Insurance: Determining Reconstruction Costs

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Home features that have the greatest impact on reconstruction cost

Reconstruction cost, not market value or assessed value, is used by insurers to determine homeowner coverage limits and is an important factor in determining a policy’s premium. Because of the many variables involved, the estimating tools that insurers use to arrive at reconstruction costs have become much more sophisticated in recent years. 

At its most basic, the purpose of a homeowner’s policy is to restore the home and possessions to the way they were before a loss occurred. Therefore, it is important that the reconstruction cost estimate used to determine the structure replacement coverage amount be as accurate as possible. If the coverage is too low the homeowner may not have enough to cover the losses incurred.

Today’s best practice for reconstruction cost estimating uses information specific to each home combined with detailed construction knowledge to create an estimate ­- a method similar to those used by builders. Current localized costs of labor and building materials are applied to create a cost estimate that is unique to the specific home at the time of the estimate. This produces objective estimates without the inaccuracies that are introduced by subjective quality judgments or unsophisticated estimating tools.

In the past decade, the estimating process that an agent, call center or on-line tool used has progressed from requiring the homeowner to provide all of the details about the home to incorporating online data resources that pre-fill information about the home. This is particularly useful since a new homebuyer may not have all the facts about the home readily available. Incorporating reliable data sources into the process allows the homeowner to simply validate the information and add any additional known features; thus speeding up the insurance quote process for all parties.

The more specific information about the home supplied, the more reliable the reconstruction cost estimate will be. The following are building characteristics that generally have the most impact on the reconstruction cost of the home:

  • Square Footage: Clearly the size or the square footage of the home is one of the major factors in calculating reconstruction cost. It doesn’t take a professional builder to recognize that, all things being equal, a 4,000-square-foot home will require more building materials and labor to build than a similar quality 1,200-square-foot home.
  • Year Built: The year the home was built also plays a key role in the estimation. Older homes may have been built with different building materials or construction techniques. For example, lath and plaster interior walls rather than more modern two inch by four inch framing and drywall. Older homes also tend to have smaller rooms than modern open-plan homes, which affects the number of interior walls and thus the cost of materials and labor.
  • Architectural Style: In combination with the year built, the style of the home is another important consideration. A Queen Ann or Victorian-style home will affect features such as exterior and interior trim-crown molding, chair rails, gingerbread-and ceiling height. A sophisticated estimating tool will use the age of the home and style to understand how the home was built which influences the calculation of the final reconstruction cost.
  • Number of Stories: The number of stories in the home impacts building costs, including the cost of the foundation. For example, a 2000-square-foot home with one story requires twice the amount of concrete and/or basement finish for its foundation as a 2000-square-foot home with two stories because the two-story home foundation is half the size.
  • Foundation and Roof: The type of foundation, including basement finishes if applicable, is another major factor in reconstruction cost as is the roof cover and style.
  • Kitchen and Bathrooms: Kitchen and bathroom cabinets and countertops have a significant impact on the cost along with built-in kitchen appliances and bathroom size and fixtures. Both the quality of materials and workmanship in these rooms can vary dramatically irrespective of the size, age or style of the home – sometimes even within the same home. This is an area where input from the homeowner or the ability to review interior photos of the home can be crucial to getting the cost estimation right.
  • Garages: The size and type of garage will impact the reconstruction cost as well. Attached, built-in*, and basement garages all impact the final cost.

Of course there are many other features of the home that add to the overall cost that are taken into account by the reconstruction cost estimator. However, features such as HVAC, flooring, whole-house systems and other elements tend to have a lesser impact on the total cost than the features and characteristics described above.

Because big ticket items such as swimming pools, detached garages, pool houses, outbuildings and sports facilities are not typically attached to the home they don’t have a significant impact on the primary structure (Coverage A) reconstruction cost. These detached structures are typically covered in homeowner’s policies under what’s called Coverage B, and the reconstruction estimate will provide a separate cost figure for these features of the home.

Accurately estimating reconstruction costs, which has evolved into a fairly simple task for the agent, homeowner or underwriter, requires a sophisticated estimation tool with a thorough understanding of construction techniques and the interplay of building characteristics as well as up-to-date, localized material and labor costs.

1 Built-in garages are garages attached to the home with living area above the garage.

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