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Identifying True Insurance Needs Based on Realistic Rebuilding Costs

Ward W. Melville    |    Insurance

Because the reconstruction cost to rebuild a home is generally higher than the original cost to build that same home, the topic often leads to difficult conversations between the insurance agent and homeowner. That’s why it’s important for both insurance agents and homeowners to understand why reconstruction often costs more than new construction—even if the home is still relatively new. Many homeowners do not realize that the sale price, the appraisal value and the mortgage amount are all somewhat irrelevant when it comes to determining how much insurance coverage is required. The appropriate insurance coverage for a home is the actual cost to rebuild after a total loss; a number that can be significantly different than the purchase or construction price. Estimating methodologies to determine a property’s Insurance to Value (ITV) ratio are designed to calculate the fullest exposure a homeowner may experience in the event of property loss.

Most homes purchased within planned communities are typically built by general contractors known as production builders. In an effort to appeal to large numbers of homebuyers, production builders use innovative designs to attract and sell homes while also using construction practices that streamline costs in order to remain profitable and competitive. The production builder’s business model is designed around economies of scale, with the costs of building materials pre-negotiated. These builders offer limited home styles within a community and are thereby able to pre-determine the total materials needed to complete the entire project. As a result, they are able to negotiate significant discounts with their material suppliers by placing orders in bulk. These economies of scale also apply to the cost of labor. Production builders pay local subcontractors and tradesmen a set price for each home. This incentivizes the subcontractors to complete work as quickly as possible, which helps to maximize the production builder’s profit.

Cost-saving business models for mass-produced new construction homes can’t be applied in the reconstruction of a single existing home damaged by peril. Instead, reconstruction contractors and/or custom home builders are engaged to manage the rebuilding. The resulting impact for the homeowner relative to insurance coverage is that it is usually very difficult to rebuild a single home at the original construction price.

Since 1997, CoreLogic has maintained a total loss property database as a basis for industry benchmarking and analysis of reconstruction costs throughout the country. According to our analysis, where there is total loss occurrence or damage down to the “plateline”, it is more expensive to rebuild a structure after a loss; with economies of scale for both material and labor being the largest contributors to cost differences. Reconstruction can take longer and increase the cost of labor when contractors confront simple tasks such as accessing a jobsite in a built-out neighborhood. Contractors must frequently work between and among existing homes, while being respectful of neighboring property and noise levels.

Additional factors that influence reconstruction productivity include:

  • Less buying power and fewer efficiencies and economies of scale
  • Top-down construction: new construction begins at the foundation and builds upward, but repairing a house that is not totally destroyed often means removing the roof and rebuilding from the top down; a far more time-consuming and labor-intensive procedure
  • Scheduling of work, particularly with skilled labor, is more difficult with single projects
  • Limited or difficult access to the worksite
  • More intensive homeowner involvement slows production
  • Code compliance, demolition and debris removal
  • Higher workers’ compensation costs
  • Landscaping and other site improvements

The sum of these factors helps explain why reconstruction almost always costs more than new construction, especially in large, planned communities. That’s why it’s so important that you have the right insurance coverage for your home.

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