Don’t Be Underinsured: Rebuild Cost vs. Market Value
Understanding the difference between your home’s market value and its insured or replacement cost is critical in ensuring you’re not underinsured. Market value reflects what a buyer would pay for your property, including the value of the land, whereas insured value, also known as dwelling coverage, focuses solely on construction costs required to rebuild your home.
Many people think of what they paid for their home as their maximum potential loss in a home insurance claim. There’s a bit more going on with the numbers, though, and it’s to the insured’s benefit.
Rebuild Value vs. Market Value
Understanding the nuanced differences between the rebuild value insurers use to determine the replacement cost for your property and market value is pivotal in safeguarding your home with the appropriate insurance coverage.
Replacement cost refers to the expense of rebuilding or repairing your home at current construction and labour prices, without accounting for depreciation.
This figure is determined by various factors, including the home’s size, age, special features, and current construction costs.
Key Differences Between Rebuild Value and Market Value:
- Rebuild Value focuses on the cost to reconstruct your home as it is now, using current materials and labour costs.
- Market Value includes the land value and is influenced by location, neighbourhood desirability, and real estate market conditions.
- Insured Value should align with rebuild value, not market value, to ensure adequate coverage.
- Land Value is included in market value but not in rebuild value.
Conversely, market value is the price your property might fetch on the open market, influenced by the real estate economy, property location, and other external factors. While market value encompasses the land on which your property sits, the insured rebuild value or replacement cost focuses solely on the cost of reconstructing the building itself.
To accurately insure your home, understanding these distinctions is crucial. For instance, insuring a home at its market value could result in overinsurance or underinsurance since this figure includes land value. On the other hand, the replacement cost provides a more accurate reflection of the expenses you would incur to rebuild your home as it stands, ensuring you’re covered adequately in case of a disaster.
Rebuild Cost: How it’s Calculated
The rebuild cost of your home is not based on the market value or what you paid for the property. Instead, it is the sum total of expenses required to tear down the existing structure and rebuild your entire home from the ground up. While you may have purchased your home for $250,000, the rebuild value will likely differ due to:
Inflation and Rising Costs
Over time, the cost of materials and labour has increased significantly. Construction materials like lumber have become more expensive, and labour wages have also risen. These factors contribute to the higher rebuild cost.
Consider the cost of tearing down the existing structure, debris removal, purchasing new materials, and hiring labour. All these expenses add up and influence the insured value of your home.
Unique Features and Improvements
Factors That Increase Your Home’s Rebuild Value:
- Custom Features: Unique architectural elements or specialty finishes
- Kitchen Upgrades: High-end appliances, custom cabinetry, or specialty countertops
- Bathroom Renovations: Luxury fixtures, specialty tile work, or custom showers
- Structural Improvements: Additions, finished basements, or attic conversions
The insured value also considers your home’s unique features and any improvements you have made.
Modern home insurance policies consider factors such as the number of storeys, square footage, and upgrades to the kitchen and bathrooms. These enhancements add value to your property and are reflected in the rebuild cost.
Determining Rebuild Value
Insurance companies use advanced tools and databases to accurately determine your home’s rebuild value. One such tool is iClarify, which accesses a vast database of property information, including claims and inspection data.
By leveraging this information, insurers can provide a more accurate estimate of your home’s rebuild value.
The Role of iClarify
iClarify employs a four-step process to calculate the replacement cost:
iClarify’s Four-Step Process for Determining Rebuild Value:
- Geo-coding and Imagery: iClarify gathers your property’s latitude and longitude coordinates to provide accurate imagery. This data pulls construction feature information and finds comparable homes nearby.
- Confirmation of Construction Features: The user confirms the construction features of the home, ensuring the data is accurate and up to date.
- Comparison with Comparable Homes: iClarify identifies the 100 closest homes inspected or had a claims adjuster on-site. By analyzing the data on these comparable homes, iClarify determines the replacement cost.
- Calculating the Replacement Cost: Using the information gathered from the property and comparable homes, iClarify calculates the replacement cost, providing a more accurate estimate for rebuilding your home.
The Importance of Not Being Underinsured
Ensuring that your home insurance coverage accurately reflects the replacement cost of your home is vital for future claims; incorrect information could lead to claim denials or insufficient coverage, leaving you with out-of-pocket costs.
Underinsurance Warning:
Estimates suggest that around 80% of Canadian homes are underinsured by an average of 27%. This means the insured value may fall short of the actual rebuild cost by roughly a quarter, potentially leaving homeowners with significant out-of-pocket expenses following a major loss.
Reviewing and Adjusting Coverage
As the cost of materials and labour changes, it’s vital you review your home insurance coverage regularly. Some policies offer automatic inflation-based adjustments to the insured value at the time of your policy renewal, providing added protection against rising costs.
However, it is always a good idea to review your coverage with your insurance advisor at least once a year.
The Importance of Regular Reviews
Best Practices for Insurance Coverage Reviews:
- After Major Renovations: Contact your broker immediately after completing home improvements like upgrading the bathrooms or finishing your basement.
- Market Monitoring: Stay informed about construction cost trends in your area, as regional factors can significantly impact rebuild values.
- Documentation: Maintain detailed records of home improvements, including before and after photos, receipts, and contractor information.
- Inflation Protection: Consider policies with built-in inflation protection to help your coverage keep pace with rising costs between reviews.
FAQs
What is the difference between market value and rebuild value?
Market value is what your home would sell for on the real estate market and includes the value of the land. Rebuild value is the cost to reconstruct your home from the ground up using current materials and labour costs, without including land value.
Why is my home’s rebuild value higher than what I paid for it?
Your home’s rebuild value may be higher due to inflation, rising construction costs, and the expense of demolition and debris removal. Additionally, custom features and improvements you’ve made can increase the cost to rebuild compared to your original purchase price.
How often should I review my home insurance coverage?
You should review your home insurance coverage at least once a year or every ten months. Additionally, you should contact your broker immediately after completing any significant home improvements or renovations to ensure your coverage reflects these changes.
What factors affect my home’s rebuild value?
Several factors affect your home’s rebuild value, including the size and age of your home, construction materials, special features, number of stories, quality of finishes, current labor and material costs, and any unique or custom elements that would need to be reproduced.
What happens if my home is underinsured?
If your home is underinsured and you experience a total loss, your insurance payout may not cover the full cost to rebuild. This could leave you responsible for covering the difference out of pocket. Some policies also include a coinsurance clause that can reduce payouts for partial losses if the home is significantly underinsured.
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Posted in Home & Tenant on August 12, 2022 by Harvard Western Insurance
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