Homeowners insurance question -- home replacement value

[FastCarFan]

Any insurance agents out there? I have a question....

We recently moved all of our insurance (auto/home/umbrella) from one company to another, through the same independent agent. The move was primarily to save a little $.

Our home is in a desirable subdivision in an upper middle class town on a 1/2 acre lot. It was built in 1993. Home values in our area did not increase nearly as much as those on the coasts in the past few years, so our recent "market adjustment" has been relatively minor.

The new policies started in February. I questioned the replacement cost they calculated (using formulas, room count, etc.) for our home -- it was 22% higher than the market value of the home. And their claimed replacement value was about 55% higher than the market value of the home, not counting the value of the lot. After all, in the extremely unlikely event of a total loss, we would still have a buildable lot in a desirable subdivision in an upper middle class town.

As a routine practice, the new company sent someone out to better calculate the replacement value of the home. We got our replacement value letter today....

Bottom line, they calculated the replacement value of our home to be about 45% higher than the market value. And, not counting the value of the lot, their estimated replacement value is at about 85% higher than the market value of the home!

Now, I understand that replacement cost is not necessarily the same as market value. For example, in an extreme case of a very large old home with lots of custom features in a deteriorated neighborhood, I could see how the actual replacement cost could be much higher than the market value.

However, in our case, it would seem that the replacement cost & the market cost should be pretty close. They are still building new homes nearby & their sale prices are comparable to the prices of similar used homes.

I think they are dead wrong on some of their calculations. For instance, they calculated the cost of our finished basement (actually, 2/3 of the basement is finished) to be $100,000. I know for a fact that the previous owners paid $35,000 to have the basement finished in December 1999. And it is not a fancy finished basement. Basically drywall, a drop ceiling & carpet. No bathroom, bar/kitchen, bedroom, etc.

The additional premium they are asking for basically negates the slight savings we expected. But at this point, I can't cancel -- I would pay a penalty to switch mid-term.

As a point of reference, the replacement cost of the home on the previous policy was slightly higher than the market value of the home, not counting the value of the lot. Granted, it may have been time to increase the coverage, but not by 67%!

I actually used to be an independent insurance agent, but that was prior to 1986, so it has been a long time. I have not yet called my agent. I am hoping to get some advice from the all-knowing Pelican community before I contact them.

What do you suggest that I do?

Sorry this posting is so long -- I wanted to give you all of the particulars. As always, thanks in advance for the help/advice.

[berettafan]

wow and i thought this thread was going to be about convincing the insurance co of a higher figure!

[stomachmonkey]

You can't set the policy amount that YOU want to pay?

At minimum you need to have a policy that covers your mortgage amount and anything beyond that is your risk to take.

Do I have that wrong?

[KFC911]

I know it's not the same thing, but I just talked a buddy into reducing the replacement value on his sailboat (it was approx. 2x what the boat could actually be replaced for) and his policy premium dropped in half. It sure sounds like they are inflating the insured value to me...

[fintstone]

I had a similar problem and asked my insurance company why I should insure a house worth $200k for $350k. I asked "If the house burned down will they give me $350k or just "total it" and give me the actual value?" Especially since the value of the land was close to half the value of the property and would not burn. They told me that if rebuilding it exceeded the market value...I would only get market value. I told them that if that is the case, I wanted to set a specific value to insure it to (market value). After much argument and talking to several supervisors that could not explain why I would want to insure something for more than they would pay in an actual loss, I got them to insure it for the lower value (and only that of the structure), which cut the insurance bill in half.

[javadog]

Doug,

I can't comment directly on your situation, as I've never seen your house or even been to Ohio but, since I own a construction company, I thought I'd mention something. In the last three or four years, costs have skyrocketed in the construction industry. At times, some material's prices have been two to three times what they were previously. I'd be careful using past cost data to evaluate your situation.

In my area, the cost/ft. that is typical for a market price wouldn't even begin to replace a house.

JR

[KFC911]

Fint, that was exactly what I told my buddy w/ the sailboat...he was led to believe that he would receive the insured value (instead of market value) in the case of a total loss. It's such a racket

[DByers]

Just went through this recently and had to up my cost/ft for a better realistic dollar figure. To build a house in my area were now looking at $250-$275 a sq-ft. About a 1/3 of what homes are selling for in the area. Good thing I bought when the house was less then the replacement cost.

Our insurance agent is really good and sits with us at least once a year to go over things and make adjustments where needed.

[Howard Agency]

Doug, you're caught in a Catch 22 situation and there's no real villian.

Here in CA this doesn't come up to often because of the incredible land values, especially near the coast. 1500 square foot homes can cost over $1mil yet have a replacement cost of less than 1/3 of that.

It would be easy if every home loss was a total and you could buy a stated amount of coverage, but most are far less and the insurance company has to return your house to it's pre fire condition. Nothing to do with market value.

Then there the co-insurance clause. Even if you do find an insurance company that will write a lower limit policy, you could be at risk. Here's how that little sucker works.

Let's say the replacement cost of your home at the time of the loss is $200k. You carry $100k worth of coverage. The kitchen catches fire and it will cost $100k to fix. The adjuster informs you that you are a 'co insuror' of the house. They took a chance on half, so did you. Here's the check for their half of the loss, $50k.

To avoid this, most companies are pretty picky about getting adequate insurance to value, and if you do they should give you a 'guaranteed replacement cost' addendum to your policy.

There was a recent thread here about Detroit real estate values. My search showed there were over a thousand homes listed under $15k. That must be fun for the agent to explain when it would cost 10x that amount to rebuild.

Disclaimer. This is free advice, and you get what you pay for. Each state has its own peculiar rules and regs.

[FastCarFan]

Thanks for the comments/advice. I have no problem insuring my home for a "proper" amount, but I don't want to pay for more insurance than I need.

The irony is that I switched insurance companies simply because I wanted to save some premium $, & now I may end up paying more. With 4 cars & 2 teen (boy) drivers, my insurance premiums are crazy high.

It just seems like the company is valuing the home higher to justify higher premiums.

I will talk to my agent tomorrow. Thanks again.

[fintstone]

Originally posted by Howard Agency
...There was a recent thread here about Detroit real estate values. My search showed there were over a thousand homes listed under $15k. That must be fun for the agent to explain when it would cost 10x that amount to rebuild.....

So, I guess the question that comes to mind....If the $15k house burns down...will the insurance company spent $300k to build a new house (or pay a $300k settlement) or just declare it a total loss and pay $15K?. If the earlier is true...I imagine arson will soon become a big problem in Detroit.