This article suggests “the appropriate insurance coverage for a home is the actual cost to rebuild after a total loss”. The question is however “how do insurance consumers effectively address this exposure?”
Currently, many, if not most, insurers require policyholders to purchase amounts of insurance consistent with the Corelogic calculations of Reconstruction Cost, “the fullest exposure a homeowner may experience in the event of loss”. That practice has apparently increased written premiums more than 9 billion dollars a year for insurers basing required amounts of insurance on the CoreLogic Reconstruction Cost valuations. Requiring amounts of insurance based on a structure’s Reconstruction Cost is not consistent with the required amounts of insurance for most homeowners’ policies. Most home insurance policies require amounts of insurance based on a home’s Replacement Cost, the current estimated cost to build a similar structure prior to it sustaining any damage. Requiring homeowners to purchase higher limits than those indicated by the policy terms deceives the policyholder into paying more premium than would otherwise be required.
I would argue the appropriate amount of insurance in most cases would be 100% of the home’s estimated Replacement Cost (generally 30-50% less than the Reconstruction Cost) plus the generally available 150% Extended Replacement or Guaranteed Replacement Cost endorsement. These endorsements, usually available at a nominal cost, increase the amounts of insurance following a loss if the 100% Replacement Cost estimate is found to be inadequate. Instead of paying several hundred if not thousands of dollars each year for the potential difference between Replacement Cost and Reconstruction Cost, the policyholder might pay $50- $100.
I agree the CoreLogic ITV system does a good job estimating the Reconstruction Cost of a structure but until the insurance policy terms and insurer rate/rule filings change, basing required amounts of insurance on the worst case scenario Reconstruction Cost, in most cases, is unfair to the insurance consumer.
As a former property general adjuster and current claim consultant, I agree with Corelogic’s analysis. The stated limits must equal the cost to rebuild the dwelling at its current location. The policy also requires it.
Every Extended or ‘guaranteed’ Replacement Cost endorsement I have read includes the requirement to have insured the dwelling and other structures at 100% of their “replacement cost” prior to the loss.
“Replacement cost”
(1) In case of loss or damage to buildings, replacement cost means the cost, at the time of loss, to repair or replace the damaged property with new materials of like kind and quality, without deduction for depreciation.
Cov B & C are a % of limits as well as several Additional Coverages and Coverage Extensions, so setting a low limit will also make these limits low. Most people don’t increase these limits to make up the difference and some can’t be manually increased.
The ERC/GRC is there like an umbrella, to catch those rare cases where actual costs exceed the expected cost. For property that can be in CAT zones for example.
Not having the limits set adequately is unfair to the client, the agency and the carrier.
I agree the “required” amount of insurance is based on the Replacement Cost- the current cost to build “prior to the loss”.
CoreLogic’s Reconstruction Cost valuations determine the cost to rebuild ” following the loss”. Those calculations include a number of potential cost variables which “could”, not will, impact the actual repair or rebuilding costs.Those cost are determined on a “worst cost scenario” basis.
There is a big difference between ” prior to the loss’ and “following a loss”. I would argue, if the insurers intended to require amounts of insurance based on “Reconstruction Cost”, all they had to do is amend the policy to read that way. But the policies I have read say “Replacement Cost” and they have been that way for at least 25 years.
The term “Reconstruction Cost” does not appear anywhere in the policy or rate filings, how can insurers justify using it?
This article suggests “the appropriate insurance coverage for a home is the actual cost to rebuild after a total loss”. The question is however “how do insurance consumers effectively address this exposure?”
Currently, many, if not most, insurers require policyholders to purchase amounts of insurance consistent with the Corelogic calculations of Reconstruction Cost, “the fullest exposure a homeowner may experience in the event of loss”. That practice has apparently increased written premiums more than 9 billion dollars a year for insurers basing required amounts of insurance on the CoreLogic Reconstruction Cost valuations. Requiring amounts of insurance based on a structure’s Reconstruction Cost is not consistent with the required amounts of insurance for most homeowners’ policies. Most home insurance policies require amounts of insurance based on a home’s Replacement Cost, the current estimated cost to build a similar structure prior to it sustaining any damage. Requiring homeowners to purchase higher limits than those indicated by the policy terms deceives the policyholder into paying more premium than would otherwise be required.
I would argue the appropriate amount of insurance in most cases would be 100% of the home’s estimated Replacement Cost (generally 30-50% less than the Reconstruction Cost) plus the generally available 150% Extended Replacement or Guaranteed Replacement Cost endorsement. These endorsements, usually available at a nominal cost, increase the amounts of insurance following a loss if the 100% Replacement Cost estimate is found to be inadequate. Instead of paying several hundred if not thousands of dollars each year for the potential difference between Replacement Cost and Reconstruction Cost, the policyholder might pay $50- $100.
I agree the CoreLogic ITV system does a good job estimating the Reconstruction Cost of a structure but until the insurance policy terms and insurer rate/rule filings change, basing required amounts of insurance on the worst case scenario Reconstruction Cost, in most cases, is unfair to the insurance consumer.
As a former property general adjuster and current claim consultant, I agree with Corelogic’s analysis. The stated limits must equal the cost to rebuild the dwelling at its current location. The policy also requires it.
Every Extended or ‘guaranteed’ Replacement Cost endorsement I have read includes the requirement to have insured the dwelling and other structures at 100% of their “replacement cost” prior to the loss.
“Replacement cost”
(1) In case of loss or damage to buildings, replacement cost means the cost, at the time of loss, to repair or replace the damaged property with new materials of like kind and quality, without deduction for depreciation.
Cov B & C are a % of limits as well as several Additional Coverages and Coverage Extensions, so setting a low limit will also make these limits low. Most people don’t increase these limits to make up the difference and some can’t be manually increased.
The ERC/GRC is there like an umbrella, to catch those rare cases where actual costs exceed the expected cost. For property that can be in CAT zones for example.
Not having the limits set adequately is unfair to the client, the agency and the carrier.
I agree the “required” amount of insurance is based on the Replacement Cost- the current cost to build “prior to the loss”.
CoreLogic’s Reconstruction Cost valuations determine the cost to rebuild ” following the loss”. Those calculations include a number of potential cost variables which “could”, not will, impact the actual repair or rebuilding costs.Those cost are determined on a “worst cost scenario” basis.
There is a big difference between ” prior to the loss’ and “following a loss”. I would argue, if the insurers intended to require amounts of insurance based on “Reconstruction Cost”, all they had to do is amend the policy to read that way. But the policies I have read say “Replacement Cost” and they have been that way for at least 25 years.
The term “Reconstruction Cost” does not appear anywhere in the policy or rate filings, how can insurers justify using it?