We all know property values have plummeted over the last couple of years. I keep having a reoccurring discussion with many of my customers about how much it would cost to rebuild their structure after a loss like a fire or some other covered loss. Many of my customers feel the replacement value of their home or office building is much less than what’s listed on their policy. I want to clarify when we talk about replacement value, you are really talking about what it will cost to reconstruct the structure. In fact there are factors driving the difference between reconstruction cost and new construction cost.
The scope of the work is unknown until the loss actually occurs. Because part of the structure is still intact and there are other existing elements, such as; outdoor fixtures, fences, landscaping and neighbors that limit working space and access; workers need to be more careful in order to minimize damage to existing elements, making the process more time-consuming.
Matching Remaining Construction
Older properties also face a challenger when trying to match repairs to the original construction condition. Materials may be subject to special order to make sure they match the remaining or original materials. Older properties may also have architectural detail such as ornate trim and molding that may require more skilled craftsmen to replace.
There is also the additional cost of debris removal. This is part of the limit of insurance in a commercial policy and must be added to the reconstruction cost. Your homeowners insurance also includes debris removal as part of your policy limit, however should the cost of debris removal go over your coverage limit in your homeowners policy, an additional 5% over and above the limit is afforded to cover the additional debris removal cost. In either case in new building construction starts from the ground up.
Small Projects and Timing
New construction costs are often reduced when the builder is able to take advantage of volume discounts by buying in bulk. In a reconstruction project, materials are usually purchased in small quantities.
If a fire affects a widespread area, construction material can become scarce, driving up material and labor costs.
There is an inability for both the general and the subcontractor to plan for a reconstruction project. Subcontractors used in large projects are easily scheduled and usually discounted, since the subcontractor can depend on steady work for a longer period of time.
In a reconstruction project, there is extra pressure to complete the work quickly to reduce business downtime or business income loss for the insured.
Market Value vs Replacement Cost
Market value of a property is a very poor indicator of reconstruction cost. Market value is influenced by the availability of real estate, economic factors such as the number of foreclosed or distressed properties available, or the conditions of the mortgage market. A buyer’s market as opposed to a seller’s market will also influence the market value of a property. Using market value as base price for what it will cost you to reconstruct your building or home could leave you under-insured in the case of a partcial covered loss.
If you have any questions on the information contained in this article, please give me a call at 800-452-6826 or email me directly firstname.lastname@example.org
Written by: Rex Lesueur
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Disclaimer: This content is provided for general information purposes and is not intended to be used in place of consultation with our agents.