One of the most common questions that Matt is asked is “Why
is the Replacement Cost on my Home Insurance policy so much higher than what it actually cost to build my home?” This is a great question and, in fact, it is an area that Matt and I went back and forth on when we were reviewing our own Illinois Home Insurance policy.
Take any standard Frankfort home. It might cost approximately 25% more to insure (Replacement Cost) than what the home actually cost to be built
(Construction Cost). The forgotten truth is that it is actually much more expensive/costly to reconstruct a home (ex. In the event of a house fire) than it did to build/construct the house in the first place.
When a building or home is originally being constructed, the builder has the time to bid out each subcontracted trades cost. Often, the General Contractor (GC) will receive a discounted rate from the subcontractor if the GC is building multiple
homes --- this savings is then passed along to the homeowner. The BC will also receive discounts on materials as the GC is buying in bulk and has the time to wait for the materials to arrive. These two factors can constitute tremendous savings.
When a home loss occurs, the cost basis changes dramatically. The GC will be at the mercy of the supply wholesaler as the GC needs the materials immediately. The GC is again trying to outbid the competition to get materials as soon as possible. The GC is battling the reality of supply and demand economics in both labor and materials.
After a home loss, the insured (you!) wants back in his/her home as soon as possible. The Insurance Carrier wants the same thing for the insured for a couple of reasons. The first being that they want you to be happy and comfortable in your own home. Second, temporary housing and living expenses drive up the cost of a claim and every day away from home can draw ire from a customer. This hidden cost must also be figured as part of the total claim being paid.
Another hidden cost involved in any claim is the clean canvas vs. a partially damaged home/building. When constructing a new building, the builder is working with a clean and improved lot. The builder’s crews can work quickly and efficiently without stepping over debris or tearing down partially damaged walls and ceilings. After a loss, the GC crews must work cautiously while removing damaged materials and preparing the building to receive new materials. This process slows down the construction time and drives up the labor cost.
When all of these factors are considered, it is hopefully very clear why the Insurance Carriers have a higher Replacement/Reconstruction Cost on your home than what it originally cost to build. If you have any further questions, please don’t hesitate to call us at Langlois Insurance Agency #815-277-2101.
Langlois Insurance Agency