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.
