It is alarming how many people confuse the purchase price or appraised value of a residence with the cost to rebuild it.
The common thinking: My house is worth X, the land is probably worth 30 – 40% of that, so I will insure it for 70% of X, since the property won’t burn. Realtors, mortgage lenders, and tax assessors confuse the issue by inserting their own valuation methods. Since you will want your insurance policy to provide the coverage to rebuild your home after a loss, you need to insure it for the cost to rebuild it, and not some other unrelated value. You should also want your insurance carrier to guarantee that they will provide the full costs to rebuild should those costs escalate.
This excellent New York Times article explains that ariving at the proper cost to rebuild a home (and securing coverage that actually guarantees to do so) is much easier said than done.
Essentially, the insurance industry takes what can be categorized as two very different approaches to valuing and insuring homes (and cooperative apartments and condominiums). Using the most common approach, you and your agent guesstimate the cost to rebuild your home, and the insurance carrier either accepts or modestly adjusts the result. The downside? Since this is only a guesstimate, your receive no contractual guarantee that the carrier will pay the full costs to rebuild your home after a covered loss. (often referred to as”the fine print”). The article shares the plight of the many who proceeded using this approach.
The second approach is the one we recommend: have the cost to rebuild calculated by a trained professional, and place coverage with a carrier who will provide a contractual guarantee to rebuild, regardless of any future cost surges. Contact me to learn more about how this can be accomplished.
