September 22, 2018

How Much Coverage Do I Need For My Home?

November 15, 2013, by Willy Hoffman Jr., CIC

Most Home Owners mistakenly believe that their Dwelling limit should simply be the market value of their home minus the cost of the land.  The market value of your home actually has nothing to do with how much coverage you need.  Homeowner's policies pay to rebuild a property; not purchase a new one. Therefore, a limit should be based on the cost of rebuilding it using similar materials and construction.  For example, if a nuclear plant were built next to your home, your market value would likely drop significantly;  however the cost to rebuild would remain the same.

Computing the total cost of rebuilding goes beyond construction costs; factors like location, debris removal, architectural plans, and permits must also be included.  For example, if you live in an area like Georgetown or Old Town, Alexandria, you also need to take into account the added cost of working in these areas.  These areas typically don't provide places for contractors to park, so you end up having to pay all their parking tickets.  The contractors also don't have space to leave their tools and supplies over night, so you have to pay the added cost of bringing the tools and supplies in and out each day.  If you have a row house or a town house, things like debris removal can cost $60,000 or more.  Since you need to remove the debris without damaging your neighbor's home, it can't be done with a bull dozer, it must be done by hand. 

Surprisingly, most insurance companies themselves don't fully understand the high costs of rebuilding homes in areas like the Washington, DC metro area.  There is no insurance company with its headquarters here in DC; most are in much more rural areas, and their underwriters simply don't understand how it can cost $600,000 to rebuild a 2,000 sq. ft. home.  Underwriters typically base their costs on new construction costs.  The problem is that most of the homes in the DC metro area were built prior to 1950.  These homes are typically solid masonry (brick over concrete), with hardwood floors, plaster walls, and have uniquely-sized solid wood doors and windows.  All of these factors make these homes considerably more expensive to re-build compared to a newly-constructed home with vinyl siding, carpet, drywall, and standard-sized doors and windows.   National averages for construction costs just don't apply accurately for many locations.    

Many people believe that since their insurance company or agent told them what limit to use, and that their policy includes Replacement Cost Coverage, that their homes will be completely replaced if burned down.  This is unfortunately not true.  For example, if your company recommends a limit of $500,000, but at the time of loss it costs $900,000 to replace your home, they will only pay you $500,000.  Some policies do include a Dwelling Extension of usually 25%, which means they would pay up to $625,000.  Nothing in their policy says that if they recommend the coverage, they will then pay the cost to replace your home even if it costs more than your policy limit. 

Purchasing a Homeowners policy is similar to purchasing most things; you must first determine what you need , and then shop around to get the best price.  If you need a car to carry four people, you don't by a two-seater, even if it is less expensive.  Homeowners premiums are based primarily on the Dwelling limit.  A lower limit will mean a lower premium, but may end up costing you much more if you have a loss.