This is a question we receive often. The short answer is, the dwelling value coverage increases each year to keep pace with inflation and rebuilding costs in your zip code.
QUESTION: “But I can’t sell my home for that amount so why would I insure it for that amount?”
ANSWER: The reconstruction cost of your home doesn’t have anything to do with what you can sell it for. We are insuring your home for what it would actually cost to rebuild your home if it was a total loss. That’s the amount of coverage insurance companies are “on the hook” for legally, so that’s the amount of coverage you must purchase.
QUESTION: “New homes in my zip code are selling for less than this reconstruction cost, so this number is way off.”
ANSWER: When a builder builds homes, they are buying massive amounts of labor and materials and paying in bulk. For a subdivision of 100 homes, they purchase at least 300-400 sinks, 200-300 toilets, 1,000 interior doors, 300 exterior doors, etc. When 1 home burns down, for instance, insurance companies don’t have the luxury of buying labor and materials in bulk to rebuild your single home. These 2 items (sale price and insurance values) have no correlation.
QUESTION: “I don’t pay taxes on this higher value, so why do I have to insure my home for this amount?”
ANSWER: If you’re like me, you want the property value of your home on the tax rolls to be as low as possible because that’s the amount you pay taxes on. Additionally, there is a small cap on the amount your property values can increase each year for tax purposes. This amount does NOT keep pace with inflation and is not meant to be the cost of insurance to carry on your home. That’s why, when someone has owned a home for many years (10, 20 or 30 years) and you look at the tax rolls, you will see that the value is far less than the sales price. Once that home is sold, the property value jumps up to match the price the home sold for. The longer the home has been owned by the same person, the further out of whack the property tax value will be as compared to the actual Replacement Cost of the home for insurance purposes. These 2 items (taxes and insurance values) have no correlation.
If you’d like a more thorough explanation, keep reading!
Property is insured and claims are paid by one of 2 methods:
ACTUAL CASH VALUE (ACV)
- Represents depreciated value of the property
REPLACEMENT COST (RC)
- Amount necessary to purchase, repair or replace with similar quality at current prices
- Insured must carry 80% of the replacement cost at the time of the loss
Contact us today to find an insurance plan to fit your needs and budget.
If you’ve owned a home in Texas for at least a few years, you may have noticed that the Dwelling Value amount of coverage on your homeowner’s insurance and windstorm insurance policies goes up each year. This is because of inflation and a very important piece of every property insurance contract called ‘Coinsurance.’ Coinsurance is one of the core principles that every property insurance policy is built on. It defines the percentage of financial responsibility the insured and the insurer must each uphold in order to achieve accurate rating. The Coinsurance amount is 80%.
As the homeowner and policyholders, you agree to insure your home for at least 80% of the cost to rebuild the home if it were a total loss. Likewise, the insurance company agrees to pay to repair or rebuild the home when damaged by a covered peril.
HOW IS MY RECONSTRUCTION COST CALCULATED?
Our mission is to be able to make customers whole again after a loss, and that is what we do. Farmers Insurance has worked diligently at making sure our customers have the right amount of coverage. That is why we base the reconstruction cost of your home on a mixture current labor and materials prices in your zip code and inflation rates along with actual Farmers claims experience in your area.
The average cost for reconstruction in our area is between $130 – $145 per sq ft. At a time when inflation is running about 5 %, lumber prices throughout the country are up 389% from a year ago. On top of the rising costs there is a huge theme throughout the industry that not enough masons, drywallers and framers are available to meet demands. This shortage in labor is only multiplied after devastations such as Hurricane Harvey, when there is not enough labor and materials to meet demand. The only result is a dramatic increase in the cost to repair and rebuild a home.
As you know, Texas is prone to many natural disasters. We’ve had more than our fair share and predictions don’t see that trend decreasing.
“These 5 States Lost the Most Money to Natural Disasters”
https://www.move.org/these-5-states-lost-the-most-money-to-natural-disasters
NOVA Documentary, “Rise of the Superstorms”
http://www.pbs.org/wgbh/nova/earth/rise-of-the-superstorms.html
DWELLING VALUE INCREMENTAL INCREASES
Underwriters and actuaries base expected loss estimates, and thus premiums, on the full value of the properties in the insured pool. If Texas properties were routinely insured for less than a set percentage of the full value of the property, the number and dollar amount of losses would be unpredictable and therefore premiums would have to increase to unaffordable levels to be sure all claims could be paid.
The amount paid for a property insurance claim with a policy with a coinsurance clause is determined by comparing several values. If the insured purchases coverage that meets or exceeds the coinsurance requirement (usually 80% of replacement value for homeowners insurance), then payment on a claim for a loss will be the lesser of the face value of the policy, replacement cost,or actual expenditures. However, if the insured purchases coverage that is less than the coinsurance requirement (say, 60 percent of the replacement value), then payment on a claim for such a loss will be the greater of the actual cash value (ACV) or the result of the formula below, subject to the limit of the face value of the policy.
WHAT IF I LOWER MY COVERAGE TO LESS THAN 80%?
We insure homes for a minimum of 80% of replacement cost so that the claims payout is at Replacement Cost and not at Actual Cash Value. Our agency is not in the business of looking people in the eye during a claim and telling them we cannot repair or rebuild their home back to the way it was.
Home and Windstorm Insurance provide the peace of mind that comes from knowing you are protected from disasters and unforeseen events. We all hope such things never happen to us or our families, but we are here to help if they do. Contact Houston home insurance broker Worthen Insurance Group to discuss the right protection for you and your home.