Whether The value of a home for insurance purposes should be based on the cost to rebuild the residence from scratch, but many incorrectly believe it should reflect the property’s market value. According to a recent survey by the Insurance Information Institute, 48 percent of respondents came to this erroneous conclusion.¹

Although home values have dipped throughout the U.S., this trend has no bearing on what it would cost to rebuild a residence after a fire, natural disaster or other unfortunate event. In fact, the cost to rebuild custom and high-end homes continues to rise due to price increases of key building materials, such as steel, copper and asphalt roof shingles.

The Importance of Proper Valuations
Determining an accurate insurable value on a unique residence goes far beyond the cost of bricks and mortar. Every detail of the home’s interior must be considered, from designer wallpaper to crown molding.

In the unfortunate event of a total loss, homeowners may be displaced and living in temporary housing. Therefore, reconstruction often must occur in a shorter period of time than new construction. In addition, labor and material costs can go up when a general contractor needs to pull workforce from another job to work on the new project, pay overtime rates, or pay a premium for materials delivered immediately.

Nationwide, 68% of homeowners are underinsured by an average of 18%, according to a survey by insurance-services firm Marshall & Swift/Boeckh. For perspective, if your clients own residences with an average replacement value of $3 million and they were to suffer catastrophic loss, they face a potential shortfall of $540,000 to rebuild their home.

Steps Your Clients Can Take
Because so many homeowners remain unaware of the risks posed by inadequate or inappropriate insurance, here are some pointers to share with your clients:

• If it hasn’t been done in the last two years, have the home and everything in it appraised. Some insurance companies conduct in-depth inspections at the onset of the policy term to ensure sufficient coverage. There also are private home appraisal companies who can perform this critical task.
• Be sure the homeowners’ insurance coverage is equal to the current replacement value of the property structure and the possessions inside it.
• Report home improvements and renovations to the insurance provider.
• Know what is—and isn’t—included in the homeowners policy. For example, some companies exclude flood coverage and put limits on how much they will pay (usually 100% to 150% of the insured amount) if a house needs to be rebuilt after a disaster.
• Clients should review their insurance coverage needs annually, ideally with an independent insurance agent who specializes in advising affluent clientele.
• Consider whether a separate policy is needed for fine art, jewelry, wine, antiques and other collectibles. Homeowners policies cap limits on “contents” coverage. Insuring high-value collections more appropriately can provide broader protection.

1 http://www.iii.org/press_releases/dont-risk-being-underinsured-five-insurance-mistakes-to-avoid.html   

Coverage provided by a member company of Chartis Inc. The descriptions contained herein are summaries only. Please see actual policy for full terms, conditions and exclusions. All submissions are subject to underwriting guidelines. Coverage may not be available in all jurisdictions.