Homeowners Insurance: Understanding Reconstruction Costs vs Market Value

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Homeowners Insurance: Understanding Reconstruction Costs vs Market Value

They say that “home is where the heart is.” In addition to being your happy place and refuge, your home is likely one of the most expensive purchases you will ever make in your lifetime.  As such, you will want to ensure that you have the best insurance protection you can in the event your home is damaged or destroyed.  Understanding the difference between market value and reconstruction cost will help you make an informed decision when determining your insurance needs.

To help make sense of these terms, I spoke with Valda Jackson, a Risk Management Specialist with Allstate Canada. Here’s what I learned.

First, let’s define them:

Market Value: Is the price someone may be willing to pay for your home and its land in its current condition. Market value is influenced by many factors beyond reconstruction costs, including location, local crime rates, and proximity to good schools.

Reconstruction Cost: Is what it would cost to rebuild your house to original, or like standards, at current material and labour costs. This is based on the size and structure of the home itself, and includes things such as plumbing, fixtures and finishes, of the home itself, but should not include factors such as land value and the home’s contents (like furniture).

Homeowners often ask about the amount of insurance coverage they need to protect their home in the event of a complete loss.  Many assume the cost to rebuild their property will be the same as what they paid for the property, but this is usually not the case.  Insurers typically determine replacement insurance coverage on estimated reconstruction costs to rebuild the home at current day prices – market value is not part of the equation.

In addition, rebuilding a property is almost always more expensive than first-time new construction due to several factors, including:

Economy of scale

When a contractor builds multiple houses at the same time, supplies and materials can be purchased in bulk at a discount.

Cost of labour

Labour usually accounts for the largest share of homebuilding costs.  When a new home builder has several houses under construction, work can be scheduled efficiently for the carpenters, plumbers, electricians, and casual labourers.  If one house isn’t ready for wiring, the electrician can work on another.  However, when only one home is being rebuilt, the same kind of efficient scheduling is rarely possible.

Demolition and debris removal

New home construction normally begins on open ground, whereas rebuilding begins with a partially or totally destroyed structure on the building site.  While parts of the structure may still be standing, they may be unusable or unsafe, requiring demolition and removal.

Building material and unusual materials

Older homes and remodelled homes often have customized features or materials that aren’t commonly found in new homes built today.  These features and materials can be expensive or impossible to duplicate.

Access to worksite

When new homes are under construction, there is usually no landscaping, allowing for easy access to the site.  When a house is being rebuilt around existing homes, there will be lawns, fences, and other obstructions limiting site access.

Required permits and fees

It is important to have the proper building permits when you are doing construction or renovations to your home.  You may also have to pay home inspection fees and architecture and/or engineering fees.

Building code changes

Many older homes were built during times when building codes were less strict.  If you are rebuilding or restoring your home, your home may need to meet the new standards.  Even undamaged parts of the structure may have to be redone to meet current codes.

In order to be properly covered, it is important that you insure your home for at least 100 per cent of its replacement cost at current prices based on the factors listed above.  If your home isn’t properly insured at the time of loss, you may end up paying the difference between actual construction costs and what your policy covers.

Replacement value will change over time, so be sure to discuss your policy and needs with your insurance agent on an annual basis to ensure your coverage meets your current needs. It’s also important to inform your insurer if you have made any changes to your home, such as any additions or renovations, as these may increase the home’s estimated replacement cost.

Learn more about Allstate’s Home Replacement Cost Guarantee.