Whether you are a first-time home insurance buyer or have owned your home for a while, you wouldn’t be alone if you wondered how the insurance company determines the insured value of your home. People often think that they need to insure the value of their home for the purchase price, but this is a common misconception. There is a difference between Real Estate Value, Tax Value and what needs to be listed as the insured value on a home.
How Does the Insurance Company Determine Insured/Reconstruction Value on the Building?
The insurance company uses specific industry approved tools to determine the reconstruction cost on a home. The calculations will often include information like:
- Square footage of the living area of the home.
- Materials of the home. For example, is the exterior brick, aluminum, ?
- The year of construction of the home. This indicates the quality of construction and types of materials used in the time period that homes in that era were built.
- Any special features of your home, like in-ground pools, garages, finished basements or additional structures.
- The postal code – where the home is located. This may seem like a strange factor when it comes to calculating reconstruction cost of a home, but it tells the insurance company things such as the topography of the land (like the slope, ), which have an impact on architectural costs in reconstructions. Or in urban areas with high congestion, there can be other financial costs associated. Similarly, fire station and hydrant access can impact the risk as well.
Although there are many other factors that may be used, the above five points can give a good initial indication of value for standard homes.
High value homes will take additional factors into consideration and the insurance company may send an inspector to take measurements and pictures in order to verify that the value is as close to the actual reconstruction cost as possible.
Does Reconstruction Cost Include the Land?
The land value is not calculated when an insurance company determines the reconstruction cost of a home. Landscaping and features of the land may be covered by your home insurance policy, but they come as a percentage of the building coverage (with the exception of high valued homes that have extensive structures or design elements).
Why Is Insurance Reconstruction Cost Different Than Real Estate Value?
Real Estate Value is determined by the demand in the market for the home that is being sold. It takes into account the land value and reflects current market demand in the specific area the home is built in. You’ve heard the sayings about buyers’ markets or sellers’ markets, which demonstrate how home real estate value costs may fluctuate. Home sale prices are about location, demand, municipal services, and neighbourhood profile.
Why Is the Tax Evaluation On My Home Different Than My Home Insurance Building Value?
Municipal Tax Evaluations take into consideration the land value and the building value at the time of evaluation.
In insurance, we do not consider the land in the reconstruction cost. The evaluation for the municipality bases their building amount on the actual value of the building at the time of assessment. Unless your home was just built, the assessment may take into consideration the depreciated value of your property.
For example, it will not be looking to estimate the cost to rebuild, but rather a current cost of the structure with the depreciated value of materials currently in place. This is very different than the insurance approach which is interested in assessing the cost of rebuilding your property with new materials.
Understanding Your Home’s Insured Dwelling Value: Reconstruction Cost
Home insurance reconstruction values are all about rebuilding the home and do not take into account buyers’ or sellers’ markets like real estate values.
The prices of reconstruction are based solely on rebuilding the home to the same quality and condition that it was in before a loss.
The Cost of Emergency Labor, Debris Removal, and Materials
Home reconstruction value also takes into account the fact that specialized contractors may be required to rebuild the home partially or wholly following a disaster. Due to disaster conditions, like trees falling on roofs, fires, or even water damage, numerous things need to be done before reconstruction can occur, like debris removal.
Contractors and workers need to be hired to save the home from additional damage immediately following the claim, and then to rebuild the home on an emergency basis.
Costs of emergency contractors are far greater than contractors under regular circumstances. You may have three months to wait before a contractor can renovate your home, but when you have a claim, you will not want to wait. Workers need to be hired immediately to get you in the same position as you were in before a loss as soon as possible.
Preventative measures also need to be taken, such as water removal in water damage claims, to avoid mold damage or additional damage to affected property. All these things are included when a home’s reconstruction insured value is determined.
Older Materials and Market Availability
Often, homes built more than 20 years ago may have materials that are no longer easily available; these materials may cost more than what would be used to build a home today.
Inflation Adjustments and Reconstruction Value of Homes
Aside from inspections, and basic reconstruction calculations every year, the home insurance company will adjust the value of reconstruction due to inflation. This is to protect the value of the home and make sure that you maintain proper coverage. If it has been several years since your last evaluation, it is always a good idea to review the reconstruction value since market prices of materials and tools used for calculation are often updated.
Keeping your home insurance broker or company updated on any changes to your home, and asking how the reconstruction value is calculated is always a good idea. Insurance policies are meant to cover you for the total loss and reconstruction of the building. Reviewing the information every few years will help make sure that your insurance is offering you the coverage you need.