Last week, I worked with a person buying a home in the mid-cities area of D/FW. His realtor referred him to me and he wanted an insurance quote for his new home. I pulled together the information on the home including square footage, 1 story, brick exterior, etc. and used that to create several quotes. I sent him the one that had the lowest price and the best coverage.
He liked the quote but had a question. It’s one I’m asked all the time and it usually goes something like, “Ed, I’m paying $X for the home, but you want to insure it for $Y. Why?” In most cases, $Y is more than they are purchasing the home for.
Each carrier utilizes a system to determine what it costs to replace a home if it were to experience a total loss such as tornado damage or a bad fire. These systems are referred to as replacement cost systems. The amount of insurance covers 3 things;
- Any demolition required as a result of the claim
- Removal of any debris
- Repairing or rebuilding the home on a one off basis
Ultimately, the goal is have enough insurance to replace the home with a new one if there was a total loss.
Since the real estate market imploded in 2008, there are two additional factors that contribute to the difference between what the home is insured for and what it cost to purchase;
- Home prices are still bargains compared to where they were before this mess
- Inflation continues to increase the costs of repairs and new construction
Once I explained to him how the amount of insurance was determined and what it needed to cover, he understood and was supportive of the amount of coverage. He just didn’t want more insurance than he needed any more than not enough insurance to cover him in the event of a major loss.
I couldn’t agree more!