The Truth(s) Behind Replacement Cost & Insurance

Written by: Michael Tonsetic

Everybody’s a Chip & Joanna these days, or at least they think they are. But…when’s the last time you saw them reno a smoldering pile of rubble, or a home that’s been submerged like a submarine for weeks on end? That’s because you haven’t. What do they say again, ‘reality TV is anything but reality’? This is why you’ll never see an HGTV series about insurance, because it’s not all farm sinks and sliding barndoors.

Now, let’s say on the off chance they did in Fantasyland. Well, we wouldn’t be gallivanting across the Texas countryside stumbling upon the next farmhouse bargain. We’d be touring a ServPro warehouse, sifting through the ashes of forever-lost family heirlooms. Not a pretty picture, huh? And this is not the artworld, the ugliest picture comes at the highest cost.

Renovation and Reconstruction Costs:

Reality is, the average homeowner doesn’t realize that sometimes renovation & reconstructions costs like demolition and debris removal can sometimes rival the rebuild costs alone. There are labor costs behind the tech who has to painstakingly restore the china collection you inherited from your late grandmother. Just wait until you get the bill from the local Fire Department. Have fun standing in line at the Permit Office with everyone else whom lost their home in the tornado.

No offense to any homeowner, nor Chip & Joanna, but for almost 2 decades now I’ve been preaching the same thing, ‘NO…You can’t’. Back in the good ol’ days, yes, a property appraiser could throw out an acceptable figure relative to the purchase price called ‘Total Cost Estimated New’. Then 2008 woke up both the insurance and mortgage industry from decades of lax, and frankly irresponsible underwriting.

At $60-80 per sq. ft. averages to cover a residential property, both industries quickly learned the cost of vandalism and leaky pipes in vacant properties. That coupled with the fact that the insurance industry hadn’t been taking in adequate premium for said losses for decades. Next followed really the true dawn of the infamous RCE (Replacement Cost Estimation) report.

Replacement Cost Estimator:

Insurers began to incorporate third-party tech that adjuster had been using all the while. This reflected reconstructions costs including supplies, labor, and inflation that are literally updated daily on a national scale. In turn, the price per sq. ft. quickly rose to $100-125 average. Now come the present-day real estate boom which has drastically increased reconstruction costs. We’re seeing the average range of $150-200 per sq. ft., and even the mortgage industry is underwriting these figures.

The sobering reality is insurers are starting to utilize coinsurance clauses, and aptly so. Especially here in FL where rampant hail fraud is crippling their ability to even remain in business. Now, without going into grave detail over the concepts of coinsurance, let’s just say ‘if you don’t play by the rules, there will be consequences’. It’s really no different than you telling an insurer you bought a $10K piece of jewelry, but only want to pay the rate on $1K of coverage.

I’m a big fan of ‘putting things into perspective’, so if I can leave you with some sage advice: if 1” of water across 1000 sq. ft. can easily cost on average $10K in mitigation & restorations costs, what do you think it might cost if half your home were to burn down, or a tree fell through your living room? The irony is, the average homeowner pinches pennies on their most valuable asset and expect it to work according to an unrealistic expectation. Statistically, a claim is inevitable, so don’t take the gamble.