Replacement-cost guarantees are quickly disappearing.
It's hardly a happy task to ponder how much it would cost to rebuild your home after a fire, but it may be more necessary than ever. Major insurance companies are starting to withdraw their replacement-cost guarantees on homeowners policies--which promise to pay whatever it costs to rebuild a home, even if the cost exceeds the face value of the policy.
State Farm, the nation's largest homeowners insurer, has eliminated its guarantee in half of the 50 states, and has requests pending in most of the rest. Under its new plan, if you buy insurance to cover 100% of the agent's estimate of replacement cost, the company will pay only up to 120% of that face amount, even if the actual cost of rebuilding is higher.
Allstate, the nation's second-largest insurer, is also rolling out a 120% cap, which is in effect in 36 states and is expected to be extended to most of the rest. Raleigh Floyd, a spokesman for Allstate, says the company is scrapping the unlimited guarantee because it found there was no incentive for policyholders to update their coverage when they added a room or made other improvements.
Travelers has started to limit payouts to 125% of face value in some markets. Spokesman Dennis Schain says the company found that nearly 25% of its insured homeowners carried coverage for amounts at least 10% below the true replacement cost. Most likely to be underinsured, Schain says, are homes built before 1957 in a subdivision--where the original builder enjoyed economies of scale that would not come into play when rebuilding a single home today.
FIGURING THE VALUE. Replacement cost could be well below resale value if you live in a metro area with high land prices. But in communities where land is cheaper, the cost to rebuild could be higher than the cost to buy--especially if the house has pricey features, such as plaster walls, detailed woodworking and hardwood floors, common in old houses.
So how do you calculate the replacement cost?
- The first step is to fill in your agent on any remodeling you've done, then ask the agent to come to your house and assess its replacement cost.
- If you're unsure about the agent's estimate, you think your home is unusual, or you just want to play it safe, ask a contractor to evaluate the cost of a complete rebuild. A contractor who has recently built room additions in your neighborhood can give you a rough estimate without a lot of trouble. Anthony LaPelusa, a remodeler in Niles, Ill., says he would give his current customers such an estimate for free, and would charge only $75 to noncustomers.
It's especially prudent to get a contractor's estimate for a very expensive home. Judith Mintel, associate general counsel for State Farm, says the company's in-house cost calculator (which agents use to estimate replacement costs) is not intended to be used on homes that cost more than $500,000. | 