By Lorianna Kastrop, Vice President, The Kastrop Group, Inc. Architects
A friend just asked us a question that might be of interest to others – What dollar figure should I use to calculate the correct coverage for replacement cost on my homeowner’s insurance policy? Policies vary, but we recommend that you work with your insurance agent to make sure that you have adequate coverage. Here are some things to consider:
- Replacement cost is not the same as sales price. When buying a home, the price of the land is a large portion of the cost. If you lost your home in a fire, or other catastrophe, the land would presumably still be there and you could rebuild. You do not have to insure for the value of the land.
- Replacement cost should use an average cost per square foot at today’s construction rates. Update your policy annually (or when it renews) with the current going rate. Ask a licensed general contractor for a ballpark rate for new construction in your area. Obviously, variables might apply if your home is built on a slope or hillside, if it has unique or custom features, if it has luxury elements, etc. Don’t let the insurance company tell you the cost per square foot based on a “national average”. Building costs can be much higher in urban areas, and they are particularly high in the Bay Area.
- Multiply the cost per square foot times the number of square feet covered in your policy to get an overall replacement cost. Then increase that number by 10-12% to cover “soft costs” such as architectural plans, engineering, planning & building department fees, etc. Insurance companies often fail to include soft costs, but you cannot avoid paying them when you rebuild, so make sure you are covered for them.
- Check your policy for accessory dwelling coverage. This might include a “in-law” or “granny” unit, a detached garage, a backyard shed or studio, etc.
- Check your policy for “contents coverage”. Construction costs do not cover the costs of furnishings and appliances, etc., so you will want to have adequate coverage for your belongings.
- Consider “umbrella coverage” for items that are not covered in your standard homeowner’s coverage.
An example for the Bay Area might be around $400 per square foot for an entire house. That breaks down to $300/S.F. for a standard living room, bedrooms, garage, etc. and up to $600/S.F. for kitchens, and baths. If you have a 2,000 S.F. home then you will want approximately $900,000 of replacement cost coverage. ($400 x 2,000 = $800,000 + 12% = $896,000)
The policy might offer coverage of about 10% of the replacement cost for contents coverage, or $90,000. That probably isn’t enough to pay for all your furniture, clothing, appliances, fixtures, electronics, entertainment system, etc., that could be destroyed in a fire. That is why we recommend additional coverage for those items.
Again, as architects we do not have the expertise to evaluate insurance coverage. We only hope to help you consider all aspects of rebuilding costs when you are buying insurance, so that you will be adequately protected. Using our suggestions above, you can talk to your insurance agent and figure out the best, most cost-effective coverage for your individual situation.