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Homeowners Insurance-What is replacement cost?

Homeowners Insurance, actually property insurance in general has been a hot topic for the last couple years.  We continue to see rate increases and property values going up.

The big question that I get all the time is why is the replacement cost on my home going up when the market value has gone down? The cost to replace a home after a loss is determined by many factors but we have listed a few below.

Site Access – Rebuilding a damaged or destroyed home amid existing structures often means limited work site access for large equipment due to trees, fences, sheds, etc. If access is impossible, costlier hand labor may be needed to perform certain jobs.
Site Preparation – A damaged structure may need to be demolished. At the very least, debris from the damage needs to be collected and removed from the site before rebuilding can begin. New construction doesn’t need such site preparation.

Customer Service – Contractors who specialize in reconstruction often hire employees more skilled in customer service, since they’ll be working with customers who just incurred a tremendous – and possibly tragic – loss. These employees are typically paid higher wages.

Economies of Scale – Contractors who build several structures at one time gain significant volume discounts from material suppliers and skilled workers. Similarly, skilled workers such as plumbers and electricians charge contractors less money if they will be working on several dwellings at once. When it’s a one-shot deal, these discounts are lost.

Construction Method – If only the lower portion of a structure is salvageable, repair or reconstruction often must begin at the top and move to the bottom – a costlier and more time-consuming construction method than the typical bottom-to-top approach.

Custom Features and Materials – Older homes in particular may have custom features and materials that are expensive, if not impossible, to duplicate or acquire.
Inflation Rate – The cost of building materials often increases at a higher rate than other products, and significantly faster than the general rate of inflation.

Supply and Demand – Following a natural disaster that destroys many structures, local construction and building costs typically rise in response to the unexpected increase in demand. Property Protection – Any remaining property and personal belongings on the site must be safeguarded against further damage and vandalism. This may involve placing some personal property items in temporary storage.

As you can see there are many factors in replacement cost.  Market value on the other hand is determined by recent sales in your area, if  your area is hot, then homes are in demand and the price will be higher than areas that are not in demand.  As you can see, this really has nothing to do with the cost of rebuilding.

Now the big question…is your house insured at full replacement cost?  What would happen if its not?  Those are questions we will cover in our next blog.  Stay tuned!

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