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Underwriting Corner | Replacement Cost vs. Reconstruction Cost


Underwriting Corner | Replacement Cost vs. Reconstruction Cost

How much should you insure your home for?

Most non-insurance professionals answer, “enough to cover the mortgage” or “enough to REPLACE the home.” However, the correct answer requires more calculations than that. Confusing replacement or market value with reconstruction cost is one of the biggest misunderstandings of insuring property, and you don’t want to be left without proper coverage in the event your home is destroyed.

From an insurance standpoint, Replacement Cost is defined as the cost associated with replacing a new home of like kind and quality. This cost is normally associated with building a replacement home from the ground up as in new construction. Market Value is defined as what a buyer would pay for a home on the real estate market. Lastly, Reconstruction Cost provides the cost to “reconstruct” an exact duplicate or replica of the original home, using like kind and quality and up-to-date building standards and accounting for structural damage from a covered loss.

Structural damage could include new blueprints, demolition, salvage and debris removal, etc. These costs are normally not associated with the other cost estimations, but they are the main thrust of calculating accurate reconstruction cost.  According to Forbes Magazine, the biggest mistake a homeowner makes when purchasing insurance is not having “enough insurance to cover the cost of rebuilding/reconstructing their house if it’s destroyed”.  The recommended remedy: complete a replacement cost calculation using a professional replacement cost estimating tool.

Lighthouse Requirements

  • Policies written as new business where dwelling coverage is included at replacement value, are required to be written at 100% replacement cost.
  • Additionally, any policy that elects to carry the optional Increased Dwelling Replacement Cost endorsement must be written at 100% replacement cost.
  • Agents should maintain copies of the replacement cost estimator used when binding coverage.
  • Requests to change existing Coverage A limits or add the optional Increased Dwelling Replacement Cost endorsement require a replacement cost estimator to be included with the request.

Lighthouse Insured to Value

  • All new business policies that insure the dwelling to replacement cost will be required to complete the replacement cost calculation as part of the binding process.
  • All new business will still be expected to be insured to 100% replacement cost but, because this is an estimate, coverage can be bound within 95% – 125% of the returned replacement cost calculation.

The information provided here is only applicable to Lighthouse Property Insurance Corporation and should not be construed as guidelines or options available for general knowledge. For assistance with any of these applications, please contact your Lighthouse Marketing Representative.