Home Buying in 63303>Question Details

Huberkify, Home Buyer in 63303

Can someone help me understand Home Owner's 100% Replacement Cost Insurance?

Asked by Huberkify, 63303 Tue Apr 12, 2011

How are insurance company's expert home builder estimators? Here's my dilemna. I purchased this home for $135k and the appraisal came back at $143k. WIthin the appraisal, the appraiser used a cost approach to estimate the value this home which came in around $162k (which includes $20k for the land). Now, the insurance company uses their sofisticated software to estimate the replacement cost of this 1,555 sq. ft. home at $218k for 100% RC. (I did get a replacement cost estimate value at $298k from another company). I am trying to bridge the $60k gap, but the insurance company can not offer any reasonable explanations, just thats what the computer software says it would cost. Is there anyway around this? It seems like I would be overpaying for insurance it I paid a premium on a $218k policy. I am at a lost at what I should do, but I do feel like I am being robbed by my insurance company.

Help the community by answering this question:


You will get a lot of opinions on this forum but it's best to speak with an insurance broker for the best answer.
0 votes Thank Flag Link Sat Sep 21, 2013
The insurance company is estimating the cost to REBUILD the home. Not the value at resale. They are different things. Keep in mind New v. Used and the possibility that construction costs may increase if a disaster were to damage many homes in the area.
0 votes Thank Flag Link Sat Sep 21, 2013
I discovered this new method ("gimmick" may be a better word) for calculating HO premiums for the first time this year after my old insurance company of 20+ years jacked up my premiums by 10% last year and 20% this year despite the fact I've not had a claim in over 5 years (home struck by lightening). Until now, I've never heard of an insurance company dictating the amount of my coverage. I understand the rational for it but it seems like it just opens the door for insurance companies to write their own ticket. Granted, there have been some catastrophic disasters but the only likelihood that a home in my area would be entirely destroyed is by fire. We know that is a rare incident that shouldn't warrant a premium hike but everyone chips in with higher premiums. What a cash cow. In my eyes, its just another justifiable way to ratchet up premiums and boost the bottom line at the consumer's expense. For example, they boosted my premium, which I set at 20% above market price voluntarily, by another 14% for a deck that was added. What if I don't want to replace the deck? Too bad, I'm paying for it. Also, the replacement cost estimate can vary significantly from one company to another.
0 votes Thank Flag Link Sat Sep 21, 2013
Think about it this way. You can find a house you like, negotiate with the owner, and borrow most of the money needed to complete the transaction from a bank. All of this revolves around the "market value" of the property. Unless the home was built in the last few years the cost to rebuild the home is likely very different than the cost to purchase the home.
You buy it for $143,000 / 1,555 = $86 per square foot market value
Say you own that house today and it burns to the ground or a tornado blows most of it away and you want to replace the house with one that is similar in size and features.
You will hire a contractor to demolish what remains of the old structure, then you will pay to dispose of that material, you will likely have to redo all the plumbing, gas, and electric from the street to the home. This can cost you anywhere from $10,000 to $20,000 or even more.
$143,000 - $20,000 leaves you $123,000 for the rebuild. (you have $79 per sqft to rebuild)
Your city zoning may require updates to bring the replacement house inline with current regulations. If the home was partially damaged the city can require you to make updates to the UNDAMAGED part of the home to bring it inline with current code. Was the old house too close to the set back or property line? Was there some feature that was grandfathered in? Uh-Oh!
$123,000 - $5000 = leaves you $118,000 (you have $75 per square foot to rebuild)
Now you get to start getting bids, submitting plans to the building department, pulling permits, buying materials, and hiring laborers. By the way you currently live in a hotel, eat all your meals in restaurants, dry-clean your clothes, and your pets are at a boarding facility. These items are covered seperately on your policy - how long does your company give you? Some companies only pay out for 6 months. Can you demo and rebuild an entire home in 6 months?
Status update: life stinks! You want that house built and you want it now - meaning you are going to basically pay the big box retail rate for materials. Do you want the contractor to drop everything and start on your project now? That will also cost you!!
Maybe you live somewhere it snows and it's impossible to put up a roof, pour cement, etc this can delay the process or adds significant cost to the project.
Does any of the above have anything to do with what you paid for the house?
Is the cost of labor and materials more or less than when the home was built?
Can you say Tsunami, Forest Fires, Hurricane Katrina, Sandy, etc - The cost of materials has skyrocketed in the last 10 years.
Your insurance company is going to use a reliable contractor with a good reputation, who is bonded and insured, and who will usually put a guarantee on the work that is done. Not mr el-cheapo down the street
Try calling a couple big name contractors with a good reputation in your area and ask them this...
If a house was total loss - what dollars per square foot would they estimate the cost to rebuild the home. In the mid west your low end number is going to run $130 to $150 per square foot on the repair.
0 votes Thank Flag Link Mon Aug 12, 2013
so I go buy a brand new house instead for the same size and it will cost significantly less. I bought my house 11 years ago for 250,000.00. I can buy a brand new house in my area for the same size for probably around 300,000. But, the insurance company is telling me the replacement cost 541,000. What?
Flag Tue Feb 23, 2016
I do have some insight into this as I have a Missouri insurance license as well as being a real estate broker.

In the past decade or so, many insurance companies got in a variety of sticky legal situations due to the property they wrote policies on being under insured. The backlash from this is that many of companies that offer homeowners insurance have significantly beefed up their estimates of replacement cost.

It also depends greatly on the property. Newer homes using modern materials will typically have replacement costs more in line with property values, however older homes using outdated materials or historic homes can have replacement costs sometimes double the market value.

One way around this is to have your insurance agent set up your policy to provide coverage not to rebuild the home you have in case of a total loss, but a functional replacement using modern materials.

I also recommend contacting an insurance broker who can shop your insurance around through multiple companies to find you the best coverage for the most competitive rate. Insurance companies have wildly different guidelines from one another which results in the huge discrepancy in rates. We refer to this in the insurance industry as the company's "appetite." For instance, one company may be trying to avoid fire claims more so than their competitors, so they give a much better rate to homes made entirely of brick. An insurance broker can help you navigate between these types of companies, whereas a captive agent who only represents one insurer can only operate within that one company's underwriting guidelines. It's also very tedious to contact a bunch of insurance companies directly.
0 votes Thank Flag Link Mon Sep 26, 2011
The appraisal has nothing to do with the cost to replace it brand new. I agree though that it's a ripoff... your best bet to is contact another insurance co or two and get the lowest premium for the coverage you desire. I have several properties and this has always burned me... My experience is the price per s ft they use is super high because they get jacked every time someone has a loss to increase the payout. Tell your agent to reduce the amount or you will go elsewhere... you'll likely get it reduced some.
0 votes Thank Flag Link Sun Aug 28, 2011
You may be comparing apples and oranges...

Bank appraisals are used to determine the fair market value of the home - ie: what could they get in a sale if they had to repossess the home then liquidate.

Insurance company appraisals are used to determine how much it will cost to rebuild if the structure is totaled.

The relationship between the 2 is not always 1 to 1 - sometimes, resale is less then the cost to construct. Other times, the land cost is significant, so resale is significantly more than construction costs.

Additionally, conservative professionals will keep bank appraisals on the low side and insurance company appraisals on the high side - err on the side of caution...
0 votes Thank Flag Link Fri Jun 10, 2011
I would find an insurance broker in your local zip code for the best advice.
0 votes Thank Flag Link Tue Apr 12, 2011
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