Wednesday, September 16, 2009

Homeowners Insurance: Is your replacement cost still accurate?

In 2006, real estate prices were sky-rocketing, existing homes were selling quickly and new homes were popping up everywhere – at a rapid pace. Homebuilders attempted to keep up with skyrocketing demand. Model Home communities needed lotteries. Contractors, sub-contractors and manufacturers of building materials were trying to keep up. Home prices went up. Construction costs went up (although not as much). It was a booming industry and homeowner’s insurance policies were designed to keep up.

Imbedded in a homeowner’s insurance policy is replacement cost coverage. This covers the cost to re-construct your home in the event of a catastrophe (the amount is different than the market price of a home). Replacement costs in a 2006 policy were based on construction costs at the time and the primary concern (of homeowners) was insufficient coverage. Features alleviating these concerns included an annual increase in the replacement cost and in some cases, coverage up to 125% of replacement cost (in case the estimate turns out to be low). These were reasonable assumptions in 2006, but times have changed. Now, we have a new concern – excess coverage.

You know the story…

Fast forward to 2009. Home prices in our area have dropped 40% or more. New home construction is almost non-existent. Work for contractors and subcontractors is limited. There is less demand and less work for these industries. Would it cost less today to re-construct your home in the event of a catastrophe? You bet. How much less? It depends.

It’s always a good idea to review your policies. If you think this particular example may apply to you, take a look at your features and contact your agent. A good agent will run a replacement cost projection at your request. A comparison of those results against your current coverage level may reveal excess coverage. It may represent a modest reduction in premium, but every little bit helps.

If you run into difficulties pursuing this issue, please let us know.

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