Becoming a homeowner is an important milestone in anyone's life—it represents a significant financial investment. Still, it also means your commitment to a specific property and all that it can bring to you and your family. As careful as you may be, there's always the potential for disasters and catastrophes to befall your home. If that happens, you need to know that you can get the insurance compensation you need and deserve to rebuild and replace what was lost entirely. That's why it's essential to fully understand the importance of insuring your home to its full replacement value and take the necessary steps to protect your home appropriately.
If you need to confirm that your current home insurance policy covers your home to its full replacement value, our experienced insurance brokers at Morison Insurance will ensure you have the right coverage for your individual insurance needs.
Insuring your home to its full replacement value means that in the event of a total loss that destroys your entire home, your home insurance coverage provides the funds necessary to rebuild your home as it was before with new building materials, labour costs and replacement for damaged items inside. Full coverage limits are based on the amount it would cost to replace or restore your home, not the amount it is worth on the current market.
Most comprehensive homeowner insurance policies offer replacement value coverage —so why are so many homes considered underinsured? One big reason is that the homeowner did not know the importance of mentioning some of the assets, building characteristics or unique features. The professional who evaluates your home will note building characteristics to provide an accurate property value. Still, it doesn't hurt to provide your list of unique and special features to your Morison Insurance broker, so you know you have the right coverage you need to sleep soundly at night. You don't have to scrutinize and document every square inch of your property to ensure its replacement value. Still, it is vital to consider the stand-out features that will need to be replaced in the event of a disaster to return your home to its full glory.
One way to approach this task is to think about what you tell your friends and family members who want to hear about your new property because those are usually the special, stand-out features. If you first say, "It has an in-ground swimming pool!" or "The kitchen has beautiful marble countertops!" These items should be included in your policy.
Unique or special features are just some things your insurance broker and insurance carrier need to know about. Your home evaluator will take note of and disclose much more mundane information to ensure you are covered to your homes replacement value. The home valuation process will include tracking down the answers to questions such as:
These aren't the only considerations the evaluator will note down, of course, but these questions give a sense of the type of information they'll be looking for when your property is evaluated to determine its replacement value.
Generally, yes, but there are some exceptions to the rule. Keep in mind that if the home is much older and still includes some original features or building methods that aren't typically used nowadays, those structures will be replaced with modern materials and techniques to meet current building codes. For example, if you are purchasing a historic house with old-fashioned lath and plaster walls and ceilings, they would be replaced with drywall walls and ceilings when the house is rebuilt. This is necessary because drywall is a better-looking, longer-lasting, more repairable solution and because it's nearly impossible to find someone who knows how to install lath and plaster these days. Another similar example is if the home features components made with a type of wood that is now endangered or not widely available for some other reason. In that case, it would be necessary to use a different variety of wood for the rebuild.
This is a common point of confusion for homeowners because they tend to think of the value of their home as the price they paid to purchase it. Real estate market value is determined by how much people are willing to pay, and it factors in much more than just the cost of materials and labour. It accounts for the size of the property, and the selling value of comparable homes in the neighbourhood. Of course, the location is one of the most important things a real estate professional must consider when deciding on a possible sale price. The same house in a less-desirable area would fetch a lower price because prospective home buyers are willing to pay more to live in desirable locations.
However, your homes replacement cost is based on how much it would cost to rebuild a new house, like the current one, should it be destroyed. It has nothing to do with how much people are willing to pay, how much land the building is sitting on, or where it's located. Replacement cost is only about the cost of rebuilding following catastrophic damage. Because real estate market value and replacement value are determined using different factors and metrics, they aren't related. As a result, your limits may be higher or lower than the property's purchase price.
If you're purchasing a newly constructed house and you know how much the actual building materials and labour cost is, it may be a surprise to learn that the replacement cost could be higher than the original building cost. This can happen with your replacement value limits for two reasons: the cost of building materials can fluctuate yearly, which could be enough to make a significant difference. Two, home builders can take advantage of volume discounts for common materials, and the replacement contractors may not have access to the same deep discounts offered to major building companies.
No, your home's replacement value will change. The key reason is that the cost of building materials and skilled construction labour will generally increase yearly due to inflation. The cost of rebuilding your house following a disaster will be higher five or ten years into the future than it is now. That's why it's necessary to have your property re-evaluated every five years. An experienced insurance broker will reach out to you after about five years to suggest re-evaluating your replacement value home insurance. Still, it's a good idea for homeowners to keep it in mind to ensure that their insurance does cover the total, current replacement cost of their house.
Understanding how these two types of coverages differ is essential. The most critical difference is that cash value is based on the depreciated value of your building and its contents. Ontario property owners typically have a replacement value benefit because it makes much more sense from a homeowners' perspective.
For example, suppose your policy offers cash-value coverage for your water heater. When you first had it installed, it cost $2,000. But as it's used over the years, it deteriorates, and its cash value depreciates. When it suffers damage from an insured peril and needs to be replaced, your cash value settlement could be only a few hundred dollars. You certainly won't be able to replace it with a brand-new unit of the same model and type, and you likely will only be able to get a lesser-quality new unit if you pay a hefty portion of the cost out of pocket. But with this coverage, your insurance carrier provides the amount needed to replace the unit with a brand-new one of the same type—in this example, that would be a total of $2,000.
The reason why some people choose to go with a cash value coverage instead of replacement value is that the insurance premiums are generally lower—but if you can't afford the replacements you need with your cash value compensation, then your coverage isn't adequate to give you the financial protection you need. Paying slightly less on your premiums isn't worth the pain of not being able to rebuild your home should it be destroyed by an insured peril.
Replacement value home insurance is a category of coverage that pertains to the coverage limits for insurance compensation you will receive if an insured peril destroys your property. If your house is damaged or destroyed by a threat not covered by your policy, you will not receive any compensation for that damage.
At this point, you may wonder which insured perils are included in your policy. There's no such thing as a homogenous approach to insurance, so that will vary from policy to policy. It also really depends on the type of policy—if you have an "all-risk" policy, it means all risks are covered except those explicitly excluded. If you have a "named perils" policy, it means only the risks listed on the policy are covered, or in other words, the named perils. All-risk policies are more common and typically cover perils such as fire, natural disasters, theft and vandalism. That being said, it is possible to add extensions of coverage on your existing policy if necessary. Overland water coverage isn't usually included in a standard policy, for example. Still, if you live on a flood plain or in another area prone to overland flooding, adding extra coverage to your replacement value home insurance policy makes perfect sense.
The best way to ensure you have the correct coverage to fully cover the costs of rebuilding your home in the event it's destroyed is to talk to a reliable, experienced broker at Morison Insurance. We have plenty of experience with asking all the right questions to find adequate coverage for you and your property. We'll work tirelessly to track down the ideal options for your insurance coverage. Call 1-800-463-8074 or fill out our online quote form to contact our experienced Morison Insurance brokers today.
This content is written by our Morison Insurance team. All information posted is merely for educational and informational purposes. It is not intended as a substitute for professional advice. Should you decide to act upon any information in this article, you do so at your own risk. While the information on this website has been verified to the best of our abilities, we cannot guarantee that there are no mistakes or errors.