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How much do I insure my property for?

When looking to insure your property, Replacement Cost should not be confused with Market Value.  Many times we hear our insured’s argue that, “Over the past several years our home has lost value” so my insurance should be lower.  The Market Value of property will fluctuate and each year the physical structure depreciates.  As an Agent, I always advise Replacement Cost for the property valuation.  With Replacement Cost the property must be replaced “NEW” after a loss, up to the amount insured. 

The costs associated with replacing a property have not decreased and must be factored into the Estimated Replacement Cost of the property.  This becomes a moving target due to inflation and other factors as well.  Every year costs to rebuild go up and building codes are changing.  A feature many policies today carry is an Inflation Guard which will increase the insured value of the property each policy term.

Today insuring property to the Replacement Cost is done using a Replacement Cost Estimator or “RCE”.  An appraisal is acceptable by some companies as well.  The line item on the appraisal that is looked at by the agent and insurance carrier is the “Cost Estimated New”.  However, appraisals have become less acceptable over the past several years due to the wide ranges in appraised values.  During the surge in home values in 2004-2007, many appraisals were inflated.  Understandably, Insurance Companies prefer to use their own RCE for determining the property’s Replacement Cost.

How is replacement cost determined using the RCE?

Insurance companies take into account the type and year of construction, square footage, location of the property, and cost of materials:  

Type of construction:  Buildings in Florida are built with Block, Wood Frame or Metal.  Some are elevated off the ground, others slab on grade.  The quality of building materials on the exterior and interior are also taken into account.  The year of construction is important as well.  Older homes are many times not up to today’s building codes.  Some older homes may have unique characteristics that could be difficult to replace.   Interior trim, specialty hardwood floors, antique fixtures etc…  can increase the Replacement Cost of the property.

Location of the property:  This became a major factor to the RCE following Hurricane Andrew and then again in 2004 with the 4 hurricanes that hit Florida.   Building to the Miami Dade Code for hurricane compliance is more expensive than building in Atlanta, Ga.

Cost of materials:  Construction materials are consistently on the rise every year.   As well, the cost of construction will dramatically increase after a catastrophic event.  In the 1990’s as a General Contractor, I saw construction costs soar after Hurricane Andrew.  Immediately after the storm material costs increased as much as 50% due to shortage of supplies.  Labor costs sharply increased as well.

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