The Policy Maze
Homeowner policies with replacement language are structured to rebuild your home in the event of a covered loss, using similar construction quality and materials. To estimate your home’s value, the insurance carrier inspects it at the time of application. But the resulting figure is just that—an estimate.

What’s important here is that not every insurance carrier puts the same resources into determining reconstruction value. Homeowners in luxury areas, then, will be wise to consider insurance companies that specialize in insuring higher values. Those companies have dedicated staff with a higher degree of expertise to conduct a thorough interior and exterior evaluation of each home—before a loss occurs.

Reconstruction cost, meaning the expense to rebuild a home after an insurance event like a fire, will frequently exceed the cost to build the home as a new construction project. And if the home is damaged as a result of a catastrophic event like a hurricane, and additional pressures are placed on the cost of materials, the cost is likely to be substantially higher.

The Policy MazeHow much more? We asked Stephen Poux, senior vice president and head of risk management and loss prevention at AIG Private Client Group, a leading provider of insurance to successful individuals and families. According to Poux, “Rebuilding a home after a regional catastrophe, like a hurricane, may add to the total project cost. That’s called ‘demand surge.’” This effect may be magnified when rebuilding high-value homes in luxury resort areas, Poux added.

Overall, there are a number of considerations that can impact reconstruction costs. They include the priority of getting a family back into the home after a loss, the cost of hard-to-find materials, access and staging issues in existing neighborhoods, availability of skilled labor and the profit and overhead for contractors, architects and decorators.

Time constraints associated with any homeowner’s natural desire to get back into a home quickly can be another significant factor. Reconstruction often must occur in a shorter time frame than new construction requires. And speed adds costs. Consider that labor costs may increase when a general contractor reassigns his or her workforce from another existing project. Add to this the premium on skilled labor and quality craftspeople that have the skills to work on high-end custom homes.

“Gaining access to the best-of-the best contractors, architects, and decorators—professionals who are in high demand and are likely booked for months, if not years, in advance—may come at a premium. It’s supply and demand,” Poux told us.

New building codes in many areas also impact the choice of construction materials and the design of a new home. Consider the new codes in many coastal areas governing wind-resistant windows and other steps designed to withstand greater wind speeds. Add to that the trend of consumers wanting environmentally friendly designs (green construction) and the advances in “smart home” technology. Each of these emerging trends adds to the final cost of the project.

The lesson here? Property owners and their advisory teams are wise to include the services of a quality broker and an insurance provider that specialize in valuing and adjusting high-value homes.


Caetlyn Fallon is a Personal Insurance Advisor at Cook Maran & Associates

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