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Can The Rising Costs of Building Materials Affect Your Insurance Coverage?

The cost of building or rebuilding homes, outbuildings and commercial structures has increased in recent years with little signs of slowing. In fact we have seen record highs hit in the past weeks just on lumber prices! This rise is due to multiple factors including reduced manufacturing capacity and an increased demand for newly built homes, renovation work and commercial buildings.

Anyone, including insurance companies, who are building a new structure, or repairing an existing one, must carefully consider the cost of material and the price discrepancy between the various material choices available as prices and demand for supply are at an all-time high!

Why the rapid change?  Shutdown’s and restrictions in place due to the coronavirus pandemic have caused a delay in the production of building materials which started the rise in prices. At the same time, people spending more time at home has resulted in the desire for expansion, home improvement projects, or hobbies such as constructing sheds or woodworking which may also increase their home or building value. Businesses have also taken this time to complete renovations. This lag in construction combined with increased demand has had contractors playing catch-up and, as a result of these factors, the supply and demand for materials has increased.

So what does this mean for you and your insurance coverage?

One of the most important building/dwelling coverages in today’s insurance market is replacement cost coverage. Insured’s need to check their home or commercial insurance policies for this coverage and note what the limit is within their insurance policy.

Not to be confused with the market value of your home (the price you would get for your home on the real estate market including the cost of the land), replacement cost only covers the cost to rebuild the home/building itself if it were devastated by fire, weather events, or other insured perils. If this amount is too low, you may be under insured and not have enough coverage to replace or rebuild your home/building in the event of a loss, or in some cases, face penalties for being under insured. The amount of insurance you have for your buildings is listed in your home or commercial insurance policy’s declaration pages.

Many factors go into the rebuilding cost of your home/building. This list can include but is not limited to the size and square footage, use of the building, custom features and finishes that will cost more to replace, a finished vs. unfinished basement, a detached garage, the age of the home/building, materials such as siding, windows and roof and when the hot water, shingles, or furnace was last replaced.  All of these elements directly impact the building’s replacement cost value.

It is important for insureds to contact their insurance broker when they start and complete any renovations. That way, the insurance broker can update the home or building’s replacement value by completing a new evaluation, helping ensure that your renovations and buildings are adequately insured.

When it comes to your home or building’s replacement value, the type of coverage you have will affect the amount you may receive in the event of a claim. There are a few different types of coverage that should be noted:

  • Guaranteed replacement cost (GRC) means your home is covered for the full cost to replace your dwelling without depreciation, even if it exceeds the limit listed for your home on your policy’s declaration pages. For GRC to apply, the amount the building is insured for must not be reduced from the replacement cost derived from the accepted valuation tool used by the insurance companies to determine it’s value. It is also important to talk to your broker about any conditions you must meet, such as if there is a “same site” requirement or how frequently you must update your building’s replacement cost value for this cover to apply.
  • Replacement cost (RC) means your insurance company will pay to repair or replace the damaged portions of your home without considering depreciation but will only pay up to the limit as stated on your insurance policy’s declaration pages.
  • Actual cash value (ACV) is equal to the replacement cost as shown on your insurance policy’s declaration page minus depreciation. An insured may pay a lower premium for an ACV policy, but you also receive less money in the event of a claim than you would with a replacement cost policy.

As noted above, the cost of rebuilding has increased in recent years, so please consider taking a second look at your insurance policy’s documents and perhaps even get your home/building’s insurance evaluation updated through a professional appraiser.

Replacement cost is not something to take lightly! If you think your home or building’s replacement value needs to be updated, please contact your Drayden Insurance Broker today! Another way we are Here. For You.

 

* by Chelsea Macaulay, BA, BEd, CAIB (Hons)  June 3/21

 

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