Homes have a number of values – the value used by local municipalities to determine taxes, the value a realtor would use in selling a home and the value an insurance company uses to determine how much it would cost to reconstruct a home.
- Insurance companies look at a home’s reconstruction cost, which is the cost to rebuild basically the same home from the ground up, to determine for how much a home should be insured.
- Reconstruction cost is calculated using sophisticated software, such as Marshall & Swift/Boeckh’s Residential Component Technology. This software considers several factors, including:
- Local construction costs for building materials and labor
- Square footage
- Type of exterior construction—frame, brick or stone, or veneer
- Style of house (ranch, colonial, etc.)
- Number of bathrooms and other rooms
- Type of roof and materials used
- Fireplaces, exterior trim and other special features like arched windows
- Whether the house — or rooms like the kitchen — were custom built
- Improvements to the home such as a second bathroom, an enlarged kitchen or other additions
- Some of these factors are also considered in determining a home’s market value or potential selling price.
Ideally, all homes should be insured to full reconstruction cost.
- ERIE’s Broadcover and Extracover policies permit an insured value of 80 percent of reconstruction cost. But in the event of a total loss, the policies provide only up to the amount stated in the policy. If a home is insured to just 80 percent of reconstruction cost, only that amount is covered – not the full replacement cost.
- ERIE’s Ultracover policy requires insured values of 100 percent of reconstruction cost. The policy provides guaranteed reconstruction cost for the home and other structures, such as the garage.
- Even in the case of a partially covered loss, inadequate insurance can affect the amount a homeowner is eligible to receive for repair or replacement. For example, if the full reconstruction value of a home is $100,000 and the insured amount is less than $80,000, the Policyholder would not be fully compensated for a covered loss. He/she would be responsible for the difference in cost and any deductible.
A number of factors contribute to underinsurance among homeowners Policyholders.
- About three-quarters of homes nationwide are undervalued for insurance purposes by an average of 35 percent, according to a 2002 study by Marshall & Swift/Boeckh, a Wisconsin-based firm that provides building cost data to the insurance, construction and appraisal industries.
- In recent years, rising construction costs and property values have increased the cost of replacing a home. From 1996 to 2002, the cost of building a home rose 28 percent in the Northeast and 33 percent in the Southwest, according to the U.S. Census Bureau.
- In some cases, homes were originally insured for their market value, and not their reconstruction value.
- Underinsurance can occur when a homeowner takes on a remodeling or improvement project, but doesn’t make changes to his or her homeowners policy.
- According to a 2000 study by the Independent Insurance Agents and Brokers of America (IIABA), one in four remodeling projects increases home values by more than 25 percent – yet, most homeowners never update their policies. Among homeowners who had recently made major structural changes, such as remodeling a bathroom or adding a room, 60 percent said they did not update their homeowners policy.
- To make sure your home is adequately insured, always notify your Agent of renovations or additions.