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Home Reconstruction Cost in the Event of a Loss
One debate often encountered when writing a homeowner policy for a new client is, "What replacement cost value should be put on the structure of the house"
An insurance company has one
goal in the event of a loss: to return the insured to the
position they enjoyed before the loss. This is the classic definition of the purpose of insurance.
Regarding a structure, the cost to replace rarely has anything to do with taxable value or
fair market value. This is because reconstruction cost is based on the going rate for labor and materials,
contrary to the the other value estimates. There is an old saying in real estate..... "location, location,
location". That is certainly true in real estate market valuations. The market value of a particular
structure can vary hugely depending on what area it is located within and that area's amenities.
But with regard
to reconstruction cost,both labor and materials are impacted by demographic boundaries less so than
market values.
Also, keep in mind that if one unfortunately suffer a loss,
their original builder will most likely not be the company to rebuild the house, they will not
receive any discounted incentives or add-ons from their custom rebuilder, and they will pay going
rates for labor and materials instead of discounted rates passed on by builders who may be building several units in a new
community.
The neighbor of one of our long time clients was unfortunate enough to lose her home to a fire,
in late 2006. The house in question was a custom 3125 square feet two story of mid 1980s
finish out. That means the finish out was very nice, but did not have features such as granite counter tops, media
room, hardwood, etc.
As can be seen from our client's note, below, if the house had been rebuilt from the
slab up, it's replacement cost would have been in the $110/square foot range.
Lastly, keep in mind that a really hot fire can crack a slab, possibly
damaging the plumbing below. It's recommended to never rebuild a house over a slab which has been cracked due
to a fire, and a builder should never agree to rebuild of one which has been damaged so.
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