Last week, I outlined the difference between the two broad types of home insurance policies; replacement cost and actual cash value (see http://bit.ly/1qLPE5W). This week, I want to build on that post and outline what goes into determining a home’s replacement cost value.
Each home insurance company I work with, has some method it uses to calculate the replacement cost of a home. Some use an internally developed system while others license a third party system such as Marshall & Swift/Boeckh or Xactware’s 360Value. Each method calculates the replacement cost based on data that’s entered into it.
The data we enter into these systems comes from the questions we ask each person about their home, as well as information from tax appraisal districts, and pictures from Zillow, Trulia, or the local MLS listing if it’s a new purchase. The data typically falls into three broad categories:
- General information
- Exterior features
- Interior features
General Information: Each discussion on home insurance begins with confirming the year the home was built as well as the square footage. The year built can indicate the type of construction materials used such as plaster walls versus sheet rock, window type, and more. In addition, we’ll confirm the number of stories the home has (two or more cost more to rebuild than a one story home), and the type of garage (attached, detached, built in, number of cars). Once that’s confirmed, we review the home’s exterior features.
Exterior Features: A review of a home’s exterior features covers the exterior siding (wood, brick veneer, stone veneer, hardie board, or some other siding type), roof material (composition shingle, architectural shingle, tile, slate, steel, etc.), and roof shape (gable, hip, gambrel, etc.). The type of siding helps determine a home’s replacement cost as well as its ability to resist fire while the roofing material also contributes to these two areas plus its ability to resist damage from hail.
In addition, we’ll add into the replacement cost systems whether the home has a slab or pier and beam foundation, as well as if porches and decks are present (size, covered, screened). Included in the estimate are the number of windows, type of sash (wood, aluminum, vinyl), and presence of specialty windows such as bay, transom, etc.
Interior Features: At this point of the discussion, we confirm number of bedrooms and bath rooms, as well as what kind of living areas the home has (formal living room, dining room, den or family room, office, laundry room, etc.). We’ll also review the finish out of the interior walls (painted sheet rock, wood paneling, molding, trim, wall paper) and the type of floor coverings in the home (carpet, tile, vinyl, concrete, wood, laminate, etc.) and percentage of each.
The bath rooms and kitchen are then placed into one of four grades; builders grade, semi-custom, custom, or luxury. What determines the category is the level of finish such as grade of cabinets, material used for counter tops, sinks, appliances, backsplash, and presence of specialty items such as a sauna, wine cabinets, heated towel racks, etc.
We also ask if the home has any specialty items such as built in cabinets, book cases, desks, home theater systems, fire place (number, type, etc.). If the home has any built in systems such as intercom, video surveillance, or some type of water treatment system, we include those too. For multi-story homes, we need to know what kind of stairs are installed (hardwood, softwood, carpeted, floating, spiral, etc.).
Once this information is input into each insurance company’s replacement cost system, it generates a number that is designed to do three things (demolition, debris removal, and rebuild the home from scratch). A proper replacement cost valuation provides enough home insurance to cover plans, permits, fencing, and everything it takes to replace your home in the event of a total loss.
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