Understanding Home Insurance and Replacement Cost

Understanding Home Insurance and Replacement Cost

One issue we consistently see when quoting new clients is undervalued home insurance. I am referring to the Estimated Replacement Cost or RCE of your home. This value is reflected in Coverage A or Dwelling Amount on your home insurance policy. This is the calculated amount it will take to rebuild the home from the ground up. 

Another issue that is more likely to impact you if your home is under-insured is the coinsurance clause in your insurance policy. The simple explanation for this clause is that your home must be insured to a certain percentage, typically at least 80%, of your homes calculated replacement cost (not market value). If you turn in a claim such as roof damage and your home is underinsured, there will likely be a coinsurance penalty.

For example, you have a home with an estimated replacement cost of $300,000 but it is insured for $150,000. You turn in a hail claim on your roof for $18,000 and you have a $1,500 deductible. The coinsurance provision would make this hypothetical claim look like the following:


$18,000 claim - $1,500 deductible = $16,500

Required amount of coverage on the dwelling ($300,000x80%) = $240,000

Actual dwelling coverage = $150,000

Coinsurance percentage (150,000/240,000) = 63% x $16,500 = $10,395 total claim payment


You successfully saved some premium over the year but ended up costing yourself an additional $6,105 out of pocket to complete the repairs to your home.

To avoid this costly mistake, make sure you work with your agent to find out how they came up with their recommended coverage amount. Talk to local contractors and find out what the going rate per square foot is for new home construction and update your existing agent on any changes or updates made to your home.

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