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
- Garage
- Unique finishes
- Customizations
- Improvements/renovations
- Upgrades
- 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 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 rlazarto@gulfshoreinsurance.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.
Choosing the appropriate insurance products for an association often involves a lengthy review process with many facets that require your attention. One overlooked detail can adversely impact the association both legally and financially.
All property insurance policies contain exclusions. An exclusion is a policy provision that eliminates coverage for some type of risk. Exclusions narrow the scope of coverage provided by the insuring agreement.
Insurance policies have exclusions for several reasons, including:
- For Catastrophic Risks – A standard insurance policy does not typically cover catastrophic risks, such as wind, or wind driven rain, but sometimes coverage is available through an endorsement, or a separate policy.
- To Reduce Duplicate Coverage – Insurance companies want to avoid the confusion of determining which policy should cover which loss. Some exclusions are designed to help clarify those differences.
- To Keep Premiums Reasonable – Excluding perils not faced by the average customer helps insurance carriers control premiums. If you require more unique coverages, you can usually eliminate some exclusions by purchasing endorsements at an additional cost.
Boards should look carefully at the exclusions for each insurance policy and consider additional coverage to mitigate any gaps or deficiencies. In doing so, it is critical to work with an insurance agency that specializes in condominium association insurance and can offer the necessary resources and expertise.
Boards and managers should periodically initiate an outside review of their association’s insurance program. The review should include an exclusions analysis to identify exposures that are not covered. Although it is impossible to mitigate all risk, being educated and understanding potential exposures is key to making informed decisions on coverage.
If you are interested in a review of your association’s insurance program, please contact a trusted client advisor at Gulfshore Insurance. We insure over 700 associations throughout Florida, offering professional service from experienced and knowledgeable personnel who specialize in associations and understand their unique exposures.
Joe Thompson is a Client Advisor and Partner at Gulfshore Insurance who specializes in managing risk for community associations and various contractors. Comments and questions are welcome at jthompson@gulfshoreinsurance.com
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.
Previously, NOAA forecasted 13-19 named storms, including 3-6 major hurricanes. There were 18 named storms last year and 15 in 2018. An average hurricane season produces 12 named storms including six hurricanes, half of which are major.
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 apelletier@gulfshoreinsurance.com
President Donald Trump recently signed an executive order and three memorandums to address pandemic relief in response to the ongoing impact of the coronavirus (COVID-19) pandemic. After negotiations for a relief package between the White House and lawmakers collapsed, the executive actions extend pandemic unemployment benefits, student loan payment deferrals, eviction protections for renters and payroll tax cuts.
Actions Extend Unemployment Benefits
One of the memorandums signed extends federal unemployment benefits. This action creates a new benefit of $400 per week into December—which is a decrease from the previous unemployment insurance of $600 per week. The $600 amount received approval in March and was scheduled to expire at the end of July. According to Trump, states will be responsible for covering 25% of costs, or $100 per week, per individual.
Much of the workforce affected by COVID-19 has been reliant on unemployment benefits, which were scheduled to expire at the end of July. Congress and the White House had been negotiating a broader pandemic aid package, with unemployment benefits discussed as a core component. In the absence of an agreement, these actions were taken by Trump to address an extension for pandemic relief programs.
Student Loan Payments, Eviction Protections, Payroll Tax Cuts Addressed and Potential Challenges
Included in the series of executive actions was an executive order addressing eviction protections for renters. The executive order notes the impact that COVID-19 has had on housing, and extends the federal moratorium through 2020, offering protections for renters. This moratorium had also expired in late July. One of the memorandums issued addresses student loan payment deferrals. Payments on federal loans were suspended through September, and Trump’s memorandum extends payments through the end of 2020. Lastly, Trump issued a memorandum deferring payroll tax obligations through 2020, directing the Treasury Department to allow employers to defer payments for the employee portions of specific payroll taxes.
Generally, federal funding is controlled by Congress, leading to potential challenges for these executive actions.
Stimulus Relief Efforts
These executive actions did not address stimulus checks. The U.S. Senate has brought bills forward with stimulus relief as part of a broader pandemic relief package. Discussions regarding stimulus checks may extend into August and September.
If you have any questions, please do not hesitate reach out to your Gulfshore Insurance Client Advisor who can offer assistance. We are here to help.
We will continue to share information as it becomes available and keep you informed.
Ryan Laude is a Client Advisor at Gulfshore Insurance specializing in employee benefits. Ryan works with a wide range of businesses to create the best funding options that fit their needs. Comments and questions are welcome at rlaude@gulfshoreinsurance.com
Insurance Journal recently released their “Top 100 Independent Property/Casualty Agencies” report for 2020. We are pleased to announce that Acrisure, LLC was ranked number two on the list, jumping four spots from 2019.
This list is ranked by total property/casualty agency revenue and comprises only those agencies whose business is primarily retail, not wholesale.
Click here to read the full article from Insurance Journal.
In 2018, Gulfshore Insurance partnered with Acrisure, one of the top 10 insurance brokers in the world, and one of the fastest growing in the industry. Acrisure has over 440 locations in 32 states, 13 international locations, and approximately 6,200 employees.
Through the Acrisure partnership, Gulfshore Insurance has access to a global network of expert partners, along with expanded resources to ensure clients receive more competitive, customized, and comprehensive solutions. This alliance allows clients to receive personalized service from a local team of trusted professionals backed by a global community of industry specialists and insurance experts.
