What is the replacement cost for my home? How do I know if the coverage on my homeowner’s insurance is correct? I paid more for my home than the amount of my insurance. Why is that? Is it right?
Those are all good questions, and the replacement cost is one of the most important coverages and rating factors on your florida home insurance policy.
Why is my Dwelling Coverage Less Than What My Home is Worth?
This is a question that we get a lot. Although you pay $400,000 for a home, the replacement cost may be $350,000 or some other number. It isn’t tied to the purchase price at all.
To demonstrate this, I use 2 extreme examples.
- A little shack on the beach – Something like this may cost $100,000 to build. However, because it’s on the water, the value may be $900,000.
- A mansion in Detroit (I know Detroit is coming back, and that’s good news.) – It may cost 1,000,000 to build, but if nobody wants to buy it, it may only be worth $600,000.
Again, those are 2 extremes. Most of our normal properties here in Florida aren’t either of those examples and our replacement costs are closer to the property values. However, ultimately the insurance is based on the replacement cost, and not the property value or purchase price.
Related: Homeowners Coverages
How Do I Know the Replacement Cost for my Home?
Insurance companies and agents have access to specific programs that are used to estimate the cost to rebuild a home. There are many different ones in the market, but Corelogic is one of the most common. These programs go through all kinds of details like what types of flooring you have, how many bathrooms, what types of finishes you have (counters, cabinets, etc.), size or porches, shape of the foundation, etc. All of this helps the company estimate the replacement cost (RCE) or how much it would cost to build the home from scratch.
This is the amount that is used for your dwelling coverage. These change based on inflation, and can have dramatic increases when big events happen like hurricanes, tornadoes, etc. It’s important that the amount is correct, because insurance policies have something called co-insurance.
Co-insurance can vary by policy, but for most standard policies, you have to be insured at least 80% of the RCE to avoid a co-insurance penalty. If you are under 80%, it means that a claim would be settled with a penalty where the insurance company covers a percentage and you cover a percentage based on how much insurance you have compared to the RCE amount.
Is my Insurance Amount Correct?
As we mentioned above, the insurance amount is based on the estimated cost to rebuild your home, not the property value. If it’s been a while since you’ve reviewed your RCE, you may want to contact your insurance agent to make sure the calculation is up to date. Since Covid, we have seen increases in a lot of building areas – materials, labor, etc. You don’t want to be underinsured, as it can cause several issues in the event of a loss.
You want to make sure that the cost to build your home is current and that your dwelling coverage on your policy is accurate. Your agent should be able to calculate this for you.
If its been a while since you’ve reviewed your policy, our Think Safe Insurance team would be happy to help you with your estimated replacement cost and we can get competitive quotes for you from multiple companies to make sure you have a great home policy.
Give us a call at 813-425-1626 or request a quote online.