Covered for Catastrophe?

What do traffic jams in the Suez Canal have to do with your homeowner’s insurance?  Surprisingly, it can affect the amount of dwelling coverage needed in the event your home needs to be rebuilt.  Dwelling is the insurance coverage you need in order to pay for repairing or rebuilding your house if it is damaged by fire, accidents or weather.  The coverage amount is sometimes confusing as it is always less than the value of your total property since it does not include the land your home is on but only the cost of rebuilding your house.

It is estimated that many homes, possibly a majority, are underinsured for rebuilding costs sometimes by hundreds of thousands of dollars.  Shortages caused by supply chain problems such as those caused by the container ship stuck in the Suez Canal have only exacerbated the problem, further raising the cost of rebuilding.  Along with lumber, builders are reporting shortages of windows, doors, appliances and more.

There are many factors that affect the amount of dwelling coverage needed.  Location, size, the age of your house, and the types of finishes in your home all make a difference and estimates range from $150 to $400 a square foot or more to rebuild.  So how much dwelling coverage do you need?

The answer is, of course, it depends.  There are different coverage limits depending on the type of policy you have.  If your policy is actual cash value (ACV) then you are only covered for the value of your home minus depreciation.  Since elements of your house such as the roof, plumbing or kitchen cabinets have aged they are considered to be worth less.  ACV, while offering the least expensive premiums, usually won’t cover the cost to rebuild your house with new materials.

If your policy is replacement cost value (RCV) you are covered for the cost to rebuild your home at current prices for labor and materials.  Guaranteed Replacement Cost (GRC) and Extended Replacement Cost (ERC) coverage will cover the cost to rebuild your home as does RCV with an additional percentage beyond your policy limits if needed to rebuild your home.  If your home is older, you might also consider adding an Ordinance or Law rider to your policy.  This covers additional costs of rebuilding related to bringing your home up to current building codes.

Going back to the question of how much dwelling coverage is needed, the most exact method of determining the answer is to have a professional appraisal done.  An appraiser can research local rates for materials and labor and provide a detailed report, but this can also cost several hundred dollars.  If you have access to a local home construction company or experienced real estate professional, they may also be able to give you an estimate on the price per square foot to replace your home at current market rates.  A conversation with an experienced and trusted insurance agent can also yield a good estimate.

The present increase in wildfires and hurricanes have spotlighted the fact mentioned above that many homes are underinsured.  Recent supply chain problems have only aggravated the problem further.  Now is an excellent time to review this important coverage.

by Carolyn Rice