The replacement cost of a home on a homeowner’s insurance policy has always been a large part of the discussion among homeowners, insurance advisors, and insurance companies. This is due to the significant role a home’s replacement cost plays in insurance pricing as well as its lack of correlation to other home valuation methods.
Let’s say you purchased your dream home for $2.5 million. The replacement cost is estimated at $2 million. Six months later, your home is destroyed by a hurricane. Whole neighborhoods are destroyed. Demand, price for labor, and construction material costs soar, driving up the cost to rebuild. The actual cost to rebuild your home is now $4 million, leaving you in a $2 million deficit. Studies show that nearly two out of every three homes in the U.S. are underinsured by at least 18%. This means that if there is a total loss, such as a hurricane, fire, or otherwise, the homeowner may find themselves responsible for a significant portion of the rebuilding cost.
On the flip side, homeowners are sometimes frustrated in understanding why their replacement cost is higher than the purchase price of their home. For example, when a property they purchased for $500,000 is required to be insured for $600,000 or more. Insurance agents routinely find themselves answering the question, “why is my home’s replacement cost so high?” And for good reason. Let’s take a closer look at how this is possible.
Every home has three different values at any given time. It is necessary to recognize all three to understand the insurance company’s calculations, particularly the difference between actual cash value and replacement cost.
- Market Value – This is the value any one individual or entity would pay you at any given time for your home, with fluctuations based on the economy. The insurance company isn’t the slightest bit interested in the market value of your home. They stick with measurable constants, such as current cost for labor and materials and depreciation based on the functional life of any piece of property.
- Actual Cash Value – This is literally the current value of the wood, nails, drywall, roof, brick, etc. The actual cash value of your home, known as ACV, decreases by the minute. Each day that passes, the physical materials which make up the construction of your home depreciate; do not confuse this with the value of a home depreciating.
- Replacement Cost Value – This is the estimated cost to rebuild your home from scratch as it is now; including today’s material and labor costs, removal of debris from the initial loss, cost of permits and architectural drafting, among other things. However, if you don’t insure to the full value of your home, you may find yourself responsible for a significant portion of the rebuilding costs in the event of a loss.
Insurance companies have the most accurate data regarding what a home costs to rebuild. How? Well, they are the ones who pay to rebuild every home that has ever been destroyed (assuming it was properly insured). Your insurer compares your home to the thousands of similar homes they have rebuilt and estimates the cost to rebuild yours accordingly.
What factors help determine the replacement cost of your home:
- Local construction costs
- Square footage
- Year built
- Exterior walls/roof/trim
- Style of home
- Number of bedrooms/bathrooms
- Unique finishes
- Ultra-high-end items
One of the major challenges with estimating replacement cost of a home is that there are many factors that could cause the replacement cost to increase after a loss that are unknown when the replacement cost estimate is being developed.
Some of these factors include:
- Demand surge after a catastrophe
- New technologies being used in home construction
- Changing construction code requirements
- Limited availability of skilled labor after a catastrophe
- Government restrictions on site access enforced after a catastrophe
- Trends in materials costs
- Fluctuating fuel costs
In addition to the current upward trend in basic building costs, rebuilding a home is almost always more expensive than constructing a comparable new one. Local ordinances often place regulations on demolition that increase expenses sharply. In general, rebuilding sites are much less accessible than a vacant lot when it comes to moving and storing materials and equipment.
A major loss to your home is traumatic enough, but to not be able to recoup rebuilding costs could be devastating. It is critical to make sure you have necessary coverage. For over 50 years, Gulfshore Insurance has weathered the storms and we know how to protect homeowners against the perils of living in paradise. If you have any questions or concerns, please do not hesitate to reach out to me.
Ron Lazarto, CPRIA is a Client Advisor and Partner at Gulfshore Insurance specializing in Private Risk Services. Ron specializes in offering customized property and casualty insurance solutions for successful individuals and their families. Comments and questions are welcome at email@example.com
Gulfshore Insurance is a Naples, Florida based insurance agency specializing in home and homeowners insurance, car and auto insurance, boat and yacht insurance, property insurance, umbrella insurance, valuables insurance for fine art, jewelry, wine, and more. Navigating insurance requires an experienced and trusted insurance agent who understands your high net worth risks and exposures. Gulfshore Insurance services Naples, North Naples, Port Royal, Park Shore, Pelican Bay, The Moorings, Naples Beach, Marco Island, Bonita Springs, Sanibel Island, Captiva, Fort Myers, Sarasota, and Southwest Florida. We have office locations in Naples, Fort Myers, Fort Lauderdale, and Sarasota.
The 2020 Atlantic hurricane season, which began on June 1st, has already produced thirteen named tropical storms, two of which reached hurricane strength, including Isaias that lashed the North American Atlantic coast.
On August 6th, the National Oceanic and Atmospheric Administration (NOAA) issued a record-setting new forecast for hurricane season, predicting as many as 25 storms — more than the agency has ever forecast.
The prediction from the National Oceanic and Atmospheric Administration (NOAA) calls for:
- 19 to 25 named storms, which includes tropical storms and hurricanes. The pre-season forecast had called for 13 to 19.
- 7 to 11 hurricanes, up from 6 to 10 in the previous forecast.
- 3 to 6 major hurricanes, which have wind speeds of at least 111 mph, the same number of these storms in the previous forecast.
Hurricane damage can’t always be prevented or eliminated, but with some careful forethought, it can be mitigated long before a storm arrives. There are some obvious preventative measures that can be conducted that require out of pocket expense like inspecting/repairing/upgrading the roof cover and perimeter flashing or installing hurricane shutters, but for the purposes of this article we will focus on the activities that churches can perform that require little to no investment other than time and energy. These are broken into Pre-Hurricane, Warning, During, and After-Hurricane phases.
In most cases, hurricane planning activities should be implemented prior to Hurricane Season which begins June 1st and continues through October 31st. However, there are plenty of measures you can take immediately before, during, and after a hurricane to reduce loss.
Click here to download an Emergency Action Plan for Churches
How Does Hurricane Damage Occur?
Widespread damage begins when a hurricane reaches around 110 mph. At this speed, the wind is sufficient enough to literally suck the roof cover from all or part of the building. In addition, high winds have the ability to turn most windblown debris into missiles, thereby breaking windows and doors. These openings then allow more wind to enter the building which creates additional upward forces on the roof. If a roof hasn’t been sucked off the building from the primary forces, once there are openings in the building, these secondary forces are sure to help blow the roof off the building. Once the roof is all or partially removed, and additional secondary holes have been punched in a building, the interior and contents are much more likely to be damaged or destroyed by rain that typically accompanies a hurricane.
Pre-Hurricane Preventive Measures
Once a hurricane is on its way, resources start to become scarce and much more expensive. Highlighted below are activities churches can perform prior to hurricane season so that they can resume operations as quickly as possible after the storm.
- Create or customize a checklist of activities that can be used during all phases of the storm.
- Appoint an individual to monitor weather forecasts and track impending hurricanes.
- Compile an Emergency Contact List with 24-hour contact numbers for essential employees and volunteers.
- Identify vital records and make backup copies.
- Qualify and pre-commit contractors and suppliers for post-hurricane repairs. (Use firms not likely to be affected by the same hurricane.)
- Stock supplies and prepare needed equipment (rations, generators, radios, flashlights w/ batteries, medical supplies, and lumber/tools/hardware).
- Relocate valuable on-floor equipment/storage to protect from water damage.
As the Hurricane Approaches (Warning Phase)
- CASH is king! Obtain and keep accessible as much as possible as banks may not be open following the storm.
- Brace lightweight doors from the inside to minimize the chance of them blowing in.
- Fill fuel tanks, generators, vehicles, etc.
- Protect or move valuable papers and important documents to a safe location.
- Print a complete copy of the property insurance policy and note the policy number and claim filing information
- Close valves on gas lines and, if possible, disconnect the electric supply at the service entrance.
- Clean the roof drains, gutters, and downspouts.
- Initiate orderly shutdown of equipment sensitive to sudden loss of power.
- Evacuate personnel.
During the Hurricane
- Remaining personnel should check for roof leaks, broken windows and piping, fires, and initiate emergency responses as needed.
- If power failure does occur, disconnect circuits so they cannot be reenergized without checking for damage.
After the Hurricane
- Survey the damage and establish priorities.
- Board up openings.
- Check circuits and equipment before restoring power.
- Follow your pre-established salvage reconstruction and recovery plan using key employees and outside contractors.
- Photograph and/or video all damage and contact the insurance carrier directly to submit a claim.
Damage from hurricanes may be inevitable, but with some careful pre-planning and diligent execution of strategic activities, you can significantly reduce the cost associated with a hurricane. Costs can escalate significantly once you consider property/wind insurance deductibles, lost production time, and supply chain disruptions. A risk manager or insurance agent can help you identify and prioritize the most critical exposures for your church.
To view our complete risk management library of articles for churches and non-profits, click here.
John Keller, CRM ARM CIC AAI is Client Advisor & Risk Manager at Gulfshore Insurance specializing in non-profit and religious organizations. John works with a wide range of business clients to deliver strategic risk analysis and guidance. Comments and questions are welcome at firstname.lastname@example.org
With the devastation and damage left by past hurricanes, it is important to note some of the nuances that apply to homeowners coverage. Did you know that if you have hurricane coverage on your homeowners’ policy, you most likely have a separate hurricane deductible? A hurricane deductible is the amount a homeowner must pay (or is deducted from total claims payout) before insurance will cover the damage caused by a hurricane.
Many homeowners don’t realize that hurricane deductibles are separate from regular homeowners’ insurance deductibles and are based on a percentage of the home’s value, typically two to 10 percent. That percentage, along with details about a policy’s hurricane deductible, usually appears on the first page of your policy.
Nineteen states and the District of Columbia have hurricane deductibles. Florida laws are very specific regarding when the hurricane deductible applies, for what duration of time, and how many can be applied in a calendar year.
In Florida, hurricane deductibles apply for damage that occurs from the time a hurricane watch or warning is issued for any part of Florida, up to 72 hours after such a watch or warning ends, and anytime hurricane conditions exist throughout the state.
Most deductibles apply on a calendar year basis (some are per occurrence). Therefore, policyholders should always file claims even when the cost to repair the windstorm damage is less than the hurricane deductible. If you file the claim, the insurance carrier has a record of the amount of credit that should be applied towards the hurricane deductible for the second or subsequent claim resulting from a hurricane. For example, in 2004, some areas of Florida were hit by three major hurricanes in about 40 days.
Hurricane damage is usually extensive. Even though a $10,000 deductible may seem steep, it pales in comparison to the cost of rebuilding your home from the ground up without the financial help hurricane coverage offers.
If you have any questions or concerns, please do not hesitate to reach out to Gulfshore Insurance, we are here to keep you informed.
Andrea Pelletier, CPRIA, CPIA is Client Advisor and Partner at Gulfshore Insurance specializing in Private Risk Services. Andrea works with successful individuals and their families on creating and customizing package insurance solutions in the areas of luxury homes, car collections, jewelry, fine arts, watercraft, and personal excess liability. Comments and questions are welcome at email@example.com
As you continue to take precautions to keep yourself and your family safe from the COVID-19 pandemic, it is important to stay prepared for other disasters like hurricanes.
The Atlantic hurricane season began on June 1st. Last month we shared tips on preparing for the hurricane season during COVID-19, but we’ve also created a helpful hurricane checklist that includes COVID-19 considerations such as:
- Including items in your “go kit” that can help protect you and others from COVID-19, such as hand sanitizer, or bar or liquid soap if not available, and two cloth face coverings for each person.
- Make sure to give yourself more time than usual to prepare your emergency food, water, and medicine supplies as some items may be out of stock last minute due to the need during COVID.
- When checking on neighbors and friends, be sure to follow social distancing recommendations to protect yourself and others.
Download the Hurricane Checklist
While there are many questions that remain about how this hurricane season will play out, we will continue to provide information and updates to keep you in the know. If you have any questions or concerns, please do not hesitate to reach out to me.
Ron Lazarto, CPRIA is Client Advisor and Partner at Gulfshore Insurance specializing in Private Risk Services. Ron specializes in offering customized property and casualty insurance solutions for successful individuals and their families. Comments and questions are welcome at firstname.lastname@example.org