The Importance of Insuring Your Home to Value

Now More Than Ever: The Importance of Insuring Your Home to Value

This era of the “Great Recession” has been a challenging one. Dramatic economic conditions have affected both the U.S. real estate market and the residential construction industry. National data collected over the past year indicates extreme financial decline, with property market values plunging up to 40% in some areas, permits for new construction down by 36.9%, and foreclosure rates spiking across the country. Ironically, the costs to rebuild and repair a home are not declining at this same rate. Overall construction costs actually increased approximately 1.3% nationwide from January 2009 to January 2010.*

As a homeowner, you may be perplexed by the gap between the current market value for your home and the replacement cost listed on your homeowner’s insurance policy.


Market Value vs. Replacement Cost

Market value (the price at which your home may sell today) is not the same as replacement cost (the price to repair or rebuild your home if it is severely damaged). When rebuilding a home, contractors must work with and match existing materials, which requires skilled labor that costs more. Plus, when a contractor rebuilds a single home, there are no economies of scale. The cost to rebuild is always higher than the initial cost to build. Market value includes factors such as the quality of the local school system and popularity of the neighborhood and, therefore, is not a good indicator of the proper amount of insurance coverage for your home. The estimated replacement cost for your home, however, is a significantly more reliable indicator of the appropriate coverage limit needed in the event of a major loss.


Key factors that contribute to rising construction costs

• Varied spikes in building material costs throughout 2009 and expected for 2010-2011.

• Fluctuating energy costs.

• A 3% increase in the cost of skilled labor from 2009-2010.

• Increased demand for imported raw materials and building products.

• Anticipated rise in inflation for 2010.


Factors that can affect home replacement cost

• Contractor Fees. The typical contractor fee is 15-20% of the overall building cost or even more for larger, more ornate homes.

• Architectural and Related Fees. Fees for architecture, interior design, engineering, and other related services should be included in the home replacement cost. These fees can add another 10-15% to the overall building cost.

• U.S. Environmental Factors. Natural disasters such as hurricanes in coastal regions, floods in the Midwest, and wildfires in the West have contributed to shortages of building materials and overall cost increases. Building codes are continually enhanced following these natural disasters, which can increase the replacement cost of a structure.

• Green Construction. The trend to build “green” is gaining momentum and popularity with consumers. Building with ultraefficient technology has contributed to rising construction costs that are 15-20% more than traditional construction.

• Rebuilding Custom and Historic Homes. The materials used to reconstruct custom homes or restore historic homes are more expensive than those used to build average homes, due to finer quality and the fact that specialized homebuilders buy these materials in relatively small quantities. Also, fewer craftsmen specialize in custom construction and historic renovation, and greater demand for these specialists has led to increased skilled labor costs.


Insuring your home to value

In order to help ensure that your Homeowner coverage keeps pace with rising rebuilding costs, contact your agent or broker to:
• Make sure your replacement cost appraisal is updated every 3-5 years.
• Maintain your policy’s annual inflation guard so your coverage is in line with construction cost increases.
• Report any significant home remodeling projects or upgrades, and make any necessary coverage changes.


*Sources: Engineering News-Record, Marshall and Swift/Boeckh, RSMeans, and Reed Construction Data, 2010.

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What are Personal Umbrella and Excess Liability Policies?

What is an Umbrella or Excess Liability policy?
Umbrella or Excess Liability policies offer higher limits of liability protection than what can normally be obtained under a Personal Auto or Homeowner policy. Typically this means you’ll have extra insurance protection to pay sums you’ll be legally obligated to pay if you cause a serious auto accident or your dog bites and seriously injures the neighbor child. Personal Umbrella or Excess Liability policies can be purchased in million dollar amounts anywhere from $1 to $5 Million dollars. The cost is determined by the amount of your exposure. Many companies have a base premium for one home and two cars and go up from there. Household drivers under the age of 25 will also impact the price of an Umbrella.

Not all Personal Umbrella policies are the same.
Some companies offer true Umbrella coverage whereby the policy not only provides Excess Liability protection over your primary home and auto coverage but also for many things not covered by one of these primary policies. In these situations, a retained limit (similar to a deductible) must be paid. Most Umbrella policies include a $250 Retained Limit.

Some companies offer Excess Liability protection that only “follows” your primary coverage. These policies generally provide excess coverage that kicks in only when coverage under a primary policy becomes exhausted.

Let me give you an example. It is fairly common while vacationing to rent a Boat or Jet Ski. Since Homeowner policies exclude Personal Liability coverage for “non-owned watercraft”, they offer no protection should you drive your rented boat or jet ski into the side of someone’s boat or even worse, cause serious bodily injury to a swimmer.

In the above scenario, an Excess Liability will not respond as there is no primary coverage available under the Homeowner policy. A true Umbrella policy however would respond and pay any defense and settlement costs that exceed the retained limit up to the Umbrella limit. It is important to know what type of policy you are buying for this reason.

Umbrella policies are not the answer to all your coverage problems but they do serve to fill the gap for most non-business related exposures.

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