One of the most common reasons homeowners become underinsured isn't because they chose the wrong policy, it's because rebuilding costs change over time. A dwelling limit that was appropriate several years ago may no longer reflect what it would cost to rebuild your home today.
Along Colorado's Front Range, construction costs have increased significantly over the past several years. Labor, materials, and construction expenses can all affect what it costs to reconstruct a home after a covered loss, making periodic coverage reviews an important part of homeowners insurance.
Rebuild Cost Is Not Market Value
Your home's market value and its rebuilding cost are two different numbers. Market value reflects factors such as the land, location, and local real estate market. Rebuilding cost reflects what it would cost to reconstruct your home using today's labor and material prices.
That's why dwelling coverage should be based on rebuilding costs rather than what your home might sell for.
How the Gap Forms
- Construction costs increase over time while dwelling limits may not keep pace.
- Home improvements and renovations can add rebuilding costs that aren't reflected in the original policy.
- The initial dwelling limit may not have been based on a detailed rebuilding cost estimate.
- Major storms and other widespread losses can increase local rebuilding costs.
More Common Than Many People Realize
One of the most common coverage issues I identify during policy reviews isn't a missing coverage, it's a dwelling limit that simply hasn't been reviewed in several years.
Keeping Coverage Current
An accurate rebuilding cost estimate is the foundation of appropriate dwelling coverage. From there, I'll review whether options such as extended replacement cost coverage may provide an added layer of protection if rebuilding costs exceed your dwelling limit after a covered loss.
Periodically reviewing your dwelling limit, and updating your policy when renovations or other changes occur, can help ensure your coverage continues to reflect the cost of rebuilding your home.
