Q: I just received my renewal notice for my homeowners insurance and I’m confused. My annual premium went up because the coverage on my home (listed under Coverage A) was increased. Why did this happen?
At Farmers Insurance®, our goal is to help customers become smarter about their insurance. So, we posed this question to Russ Lee, Chief Underwriting Officer at Farmers Insurance®. Here’s what he had to say about what factors can impact the estimated cost to rebuild your home, and why it’s important to you.
A: I’m glad you asked because this is an important topic for homeowners. The Coverage A dwelling limit represents the total amount your insurer will pay out to replace your home if it were totally destroyed. Say a person has a $100,000 Coverage A dwelling limit; that means there is up to $100,000 available to rebuild their home in the event of a loss.
When a homeowners policy is due for renewal, insurers may apply a rate of inflation to account for the increased costs of labor and materials.
While we hope no one ever has to experience a total loss, it’s important to consider the financial impact it will have on you to rebuild your home. Think about the process of rebuilding. You’d need a construction crew to do the work and new materials to rebuild. Then there are the things you might not think of, like the cost of demolishing the remaining structure of your home and removing the debris. Plus, if you are faced with rebuilding due to a natural disaster, such as a wildfire or tornado, it’s likely many of your neighbors are in the same boat. When multiple homeowners in an area are rebuilding, labor and materials costs can increase due to the high demand.
I don’t live in an area where tornadoes or wildfires are a concern. How do I determine the coverage I want?
One of the main reasons people buy insurance is to help ease their mind. While you may not be at risk of a tornado or wildfire, total losses happen everywhere. That’s why homeowners like you may want to consider speaking with a local contractor to establish a reconstruction cost estimate for your home, with all the appropriate dwelling features and quality grades, to help you select the coverage you want.
What factors help determine the reconstruction cost estimate?
The most important step is making sure that the information going into the reconstruction cost estimation is correct. Working with an insurance agent, you can input the correct dwelling features, including (but not limited to) the year built, square footage, quality grade, number of stories, number of kitchens and bathrooms, floor covering, roofing and more. This will help you land on a reconstruction cost estimate that you feel is realistic.
It’s also a good reminder to keep your agent informed about any upgrades or home improvement projects you complete each year, as these changes can impact your reconstruction cost estimate and the coverage limit you want.
Is there a reason the cost to rebuild might be different than the market value of my home?
The market value represents how much you can sell your home for today to a willing buyer. A variety of factors can influence the market value, including land value, comparable sales in the area, and community-specific aspects such as walkability, schools and location. In contrast, the reconstruction cost is purely looking at the cost of labor and materials to rebuild a home, including debris removal. It can be less than or more than the market value of a home, depending on desirability of the area and other local factors.
Now I may want even more home coverage. Anything else I should consider?
There are other options available to consumers, often at an additional cost, to enhance or extend the amount of coverage for rebuilding in the event of a total loss. Extended Replacement Cost coverage is an optional endorsement that may be available to add coverage of 10 percent, 25 percent or 50 percent of the estimated reconstruction cost, depending on the type of home insurance policy, in the event there are unexpected or unplanned increased costs to rebuild your home. For example, if your home is insured for $200,000 and you have a 25 percent Extended Replacement Cost endorsement, it would provide up to an additional $50,000 of coverage to help rebuild your home.
Another optional endorsement that may be available at an additional cost is called Building Ordinance or Law. This coverage is also generally offered as a percentage of the Coverage A dwelling limit. It can help pay for additional reconstruction costs and expenses associated with today’s building codes and ordinances, which may have changed since your original home construction.
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