Insurance Is Rebuilding My Home, But I Don’t Have Enough Money

When you lose your home to a fire, it can turn into a many months’ process of trying to rebuild everything. You typically move into temporary housing under your loss of use coverage and begin the process of buying all that new stuff. 

A customer, Bill, learned a hard lesson about home insurance when he experienced a house fire.

Although Bill’s family was safe, the house was severely damaged. They sat down with the builder who was going to rebuild their home so that they can continue with their lives.

It all sounded great. However, . . . not all proved hunky-dory.

Bill’s home insurance policy did not cover the extra costs of rebuilding his home due to the dwelling limit intentionally kept low to keep the premiums and deductibles low.

The call center employee who assisted Bill with buying the policy did not consider the cost of rebuilding the house and was more focused on making the sale.

Bill’s builder could not obtain the volume pricing discount, and the labor costs were higher.

As a result, Bill was underinsured, and he did not have enough money to cover the rebuilding process.

In this context, it is important to understand how home insurance companies estimate the cost of rebuilding a house, how the dwelling coverage amount is calculated, and why it is essential to ensure that the dwelling coverage amount reflects rising costs due to inflation and building costs.

How Home Insurance Companies Estimate the Cost of Rebuilding Your House

Home insurance companies typically estimate the entire cost of rebuilding a house based on factors such as the age and square footage of the home, the building materials used, and the local construction costs. They also consider any additional features or amenities in the home, such as built-in appliances or special finishes.

The insurance company will use this information to create an accurate estimate of the total cost of rebuilding the home, including demolition and debris removal. This estimate is then used to calculate the dwelling coverage amount for the policy.

It is important to note that this estimated cost does not include any land value or grade changes that may have occurred since the home was built.

How the Dwelling Coverage Amount is Calculated

Homeowners insurance policies typically include dwelling coverage, which is designed to cover the costs of repairing or replacing your house in case it gets damaged.

It is important to ensure that the amount of dwelling coverage matches the cost to rebuild your home, considering local materials and labor expenses, and the need to bring your home up to current building codes.

Your insurance agent needs to help provide you with a policy from your insurance carrier that has sufficient dwelling coverage that keeps you from experiencing a lack of insurance.  

For example, if your dwelling coverage is $300,000 but it costs $320,000 to rebuild your home, you would have to cover the $20,000 difference out of pocket or make compromises by reducing the scope of the repairs.

Here’s how dwelling coverage is calculated:

The dwelling coverage amount is calculated by multiplying the estimated cost of rebuilding the home by a percentage. The percent of dwelling coverage depends on how much coverage you want, but it is typically set at 80% to account for increasing costs due to inflation and building expenses.

It is advisable to have your home insurance coverage match the estimated rebuilding cost. Many companies may also generally expect at least 80% of the replacement cost as a required threshold. This is referred to as the “80% rule”.

For example, if the estimated cost of rebuilding your home is $300,000 and you choose an 80% coverage limit, your dwelling coverage amount would be $240,000.

When you purchase a home, you will need to buy homeowner’s insurance. When you do, make sure the insurance company includes a rebuild cost as part of your plan.

This should be able to cover a full rebuild. This is often written as “dwelling replacement cost.”

If you don’t want to have to pay out-of-pocket to make up the difference in coverage, make sure to insure your home for its full value. The number does not match the real estate value or tax value. The reconstruction value is determined through appraisal or calculation.

Why it is Essential to Ensure that the Dwelling Coverage Amount Reflects Rising Costs

It is important to keep in mind that the cost of rebuilding your home can increase over time due to inflation and rising construction costs.

Homeowners should ensure their home insurance coverage is up to date as inflation and building costs may exceed the current coverage amount.

Therefore, it is essential to review and update your dwelling coverage amount regularly.

In addition, you should add any renovations or remodeling projects to your policy to ensure that you have proper coverage in case of a loss.

If you are ever unsure about the amount of dwelling coverage you need, it is best to contact your independent insurance agent for advice and assistance.

The housing market continues to struggle due to disruptions in the supply chain attributed to the pandemic, increasing costs and demand. For example, National Association of Home Builders data has shown that since summer 2021, increased lumber prices have contributed an additional $18,600 to the cost of a new home.

In the event of a natural disaster like a wildfire, the cost of local rebuilding may increase due to increased material expenses, supply-chain issues, and demand for repairs.

Homeowners insurance coverage policies purchased before the disaster may not provide enough coverage for recovery.

Why Extended Replacement Cost is Important

Make sure to note, while full replacement coverage can provide financial protection for rebuilding your home in the event of a total loss, it may not always be enough to cover the full cost of rebuilding due to unexpected expenses. This is where extended replacement cost coverage can be beneficial.

By adding this extra coverage to your policy, you can ensure that you have additional financial protection beyond your policy limit, up to a certain percentage, to cover any unexpected or rising costs associated with rebuilding your home.

This can provide peace of mind knowing that you have sufficient additional coverage to rebuild your home to its pre-loss condition, even if the cost exceeds your policy limit.

Therefore, even if you have full replacement coverage, you may want to consider adding extended replacement cost coverage to your policy for added protection.

Without extended coverage, you may have a significant financial burden to cover the difference between your policy limit and the actual cost of rebuilding your home.

This could result in an income issue where you have to resort to using a credit card, take out loans or dip into your savings, which can be financially challenging and stressful.

If you underestimate the cost of replacing a home in homeowners insurance, the extended replacement coverage may not be included in the policy and other problems may arise.

Homeowners must ensure their policy is adequately covering the property to have access to coverage, otherwise the insurance provider may deny it.

If your coverage amount is below 15%, you may be subject to a penalty called co-insurance.

The penalty imposed has resulted in a decrease of money Bob and his family were eligible to receive for the home rebuild. This ultimately left them with fewer options to complete the project.

In Summary

It is advisable that the dwelling coverage should correspond to the rebuilding-cost estimate and that it is at least 80% of the replacement cost.

If the coverage amount is lower than the cost to rebuild, the claim may not provide enough money to replace the home.

It is important to periodically review the coverage amount and adjust as needed if there have been any renovations or remodels.

Extended replacement cost insurance can offer additional protection for rebuilding your home in the event of a total loss, up to an agreed-upon percentage.

It is essential to evaluate all these factors when determining if your coverage is adequate to rebuild your home after a disaster.

If you are uncertain about the amount of coverage you have, it is recommended to contact an independent insurance agent for advice, such as the Watley Insurance Group. This can help ensure that you and your family have sufficient coverage in the event of a claim.

We serve the Ark-La-Tex area, mainly helping those in Shreveport, Bossier City, Benton, Barksdale Air Force Base, Haughton, Keithville, and Blanchard. Get in touch and we will make sure you have the best coverage for the worst scenario.

Wayne F. Watley, Jr.

Agency Principal, proud husband & father, and jazz enthusiast.