'Replacement cost' insurance appraisal ?

kitchendetectiveJuly 12, 2011

Has anyone recently had an appraisal done for insurance purposes, that is, for figuring out what the cost to replace your home is, in the event of a catastrophe? Do the appraisers for the insurance company inflate the value in order to increase the premiums? Or are they pretty realistic about what it would cost to rebuild? If you built in the past 0 to 6 years, what has your experience been? Was there a huge discrepancy between what you spent on building (exclusive of land) and what your appraiser says your cost to replace to be? If so, what percentage, roughly, is the difference? (I'm finding it hard to believe there's been as much inflation in building costs as I'm being told, but I haven't kept up very closely.)

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Our insurance company sent out their own person when we built - in 6 years this September. Her findings were in line with what we had spent (a little more, but not enough to argue).

I always check each year to see what they have replacement valued in case there needs to be an adjustment.

    Bookmark   July 13, 2011 at 8:46AM
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"Do the appraisers for the insurance company inflate the value in order to increase the premiums? "

I have seen far more low appraisals.

Insurance companies like to use various 'standard cost' sources to estimate.
Wait til they try to even find someone to replace real plaster in some areas, or a thick bed tile job on a second floor.
The number of tradesmen who know how and are available is vanishingly small in some areas.

    Bookmark   July 13, 2011 at 11:23AM
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Our insurance company sent an appraiser out after the house was completed in late 2005. We reviewed our policy recently and they sent another appraiser. In both cases, the company's appraisal of replacement value was dramatically higher than our build cost (and doesn't include any valuation for the land, 200 year-old trees, etc). This makes me curious as to how much inflation in building materials costs there has been over the past 5.5 years. We are pretty rural out here, and, while city prices for land and permits are higher, building costs here tend to be higher because of lack of competition and travel distances. Yet I am still surprised.

    Bookmark   July 13, 2011 at 11:56AM
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As an agent, we deal with this daily. Imagine starting from the ground-up to replace your house after a loss. If you think it's too high, make sure to also factor in debris removal, and imagine what happens to the contractor's profit figure if there is a large scale catastrophe in your neighborhood.
Most companies use the same software vendor to estimate a replacement cost, and it's based on a number of different things such as zip code, square feet, type and age of constructions, and can get very detailed down to wall and floor finishes. Most high-end policies will provide an appraiser, and I've started to see some mainstream companies do that too.

That said, the most over-inflated values I've seen come from the houses built before 1930 when everyone used plaster. The insurance company wants to account for replacing with plaster (which explains the high vaules) but the majority of policyholders would gladly save $400-$500 in yearly premium to lower the value and use drywall.

Concerning newer homes, I'm flabbergasted what my friends are paying for newly-commisioned builds. It's 100% true, every year the cost to build goes up, as sure as death and taxes.

As a side note, our biggest problem these days is explaining to our clients that the insurance company doesn't care what your house is worth on the market, how much you owe the bank, or if you say you'd never replace the home-- their job is to replace your house after a loss, and therefore a market value appraisal is meaningless for estimating what a rebuild costs.

    Bookmark   July 13, 2011 at 12:28PM
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kitchendetective -- I don't think you can buy insurance to replace your trees or land...lol.

In this down RE market you can buy an existing house for MUCH less per sq. ft. than you can build one. (True where I live anyway; some markets are always stangant.)

    Bookmark   July 13, 2011 at 2:08PM
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Actually---I think one CAN get insurance for landscaping...including trees. I wonder if it requires a special rider?

Here is a link that might be useful: Walter Reeves article

    Bookmark   July 13, 2011 at 2:36PM
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"kitchendetective -- I don't think you can buy insurance to replace your trees or land...lol. "

Yet I know people that have....

    Bookmark   July 13, 2011 at 4:47PM
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Realize that there are costs that may not have to be replicated in a rebuild - the foundation for example...

    Bookmark   July 14, 2011 at 2:51PM
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"Realize that there are costs that may not have to be replicated in a rebuild - the foundation for example... "

Not always.

Depending on the age it may have to be completely replaced depending on the level of damage the house sustained.

The foundation must meet the present requirements, not the ones from when the structure was built.

Some places will require the foundation to be excavated for inspection before allowing any part of it to be used if it is more than X years old.

    Bookmark   July 14, 2011 at 3:57PM
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Having been involved with rebuilding thousands of properties from every type of catastrophe imaginable, it's been my experience that the insurance companies don't make a habit of valuing policies too high. I have seen maybe 1%-2% of insurance policies being overvalued. I have easily seen a third of insurance policies valued too low for many different reasons.

It's the property owners responsibility to know and understand these policies and sadly 95% of policy owners don't know what their buying. When limits are reached, you're done. Unless an E&O policy can be utilized if the broker made a mistake, when limits are reached, the well is dry.

Its buyer beware folks and what you can sell your home for has nothing to do with the value of an insurance policy!!!!

betaiota has some good points and many other variables need to be considered. The replacement policy value tends to set the basis for other coverage's such as contents, detached buildings and additional living expenses. So if your replacement value is low, you'll likely be low all the way down the line.

Most insurance adjustors will allow you to move expenses from one bucket of policy money to another but once limits are reached, it's over.

Keep in mind policy limits are affected by emergency services to the building, demolition, debris removal, cleaning and professional fees such as architects and engineers. Code upgrades which can be a big issue in older properties also can affect policy limits. To demo a house and haul the debris to a landfill can run into tens of thousands.

There are limits for contents, usually 50% of the building and some policies up to 75%. Most people don't insure valuable contents properly. If you have specific high value items in the home such as art work, jewelry, coins, silverware, collections, etc. etc. you should probably schedule these with a rider. To have all your contents, furniture, clothing, etc, etc, cleaned and put into storage while your home is being rebuilt is expensive and falls under your contents coverage.
Additional Living Expenses are usually 20% of the replacement value or it's capped at 12 months. Some higher end policies have no limits on A.L.E. but those are not typical. On a major claim for a total rebuild A.L.E. can easily run out if there are some problems or the value is too low. Unless you have money to spare, spending your own money to live in a rental property and the expenses that go with it, while your home is being rebuilt get ugly real fast.

Detached structures such as garages, sheds and pools are usually valued at 10% of the homes replacement value. If you have a detached garage with an apartment above it or an in ground pool with some nice hardscaping around it, 10% can easily be low if the main policy value is low.

In short, there are many variable to your insurance policy and you should know what they are, what you need and how much you are buying. I won't say you can never have enough insurance but if you're under insured with a major claim, you and your families lives will be adversely affected for many years to follow.

    Bookmark   July 15, 2011 at 4:50PM
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"an in ground pool with some nice hardscaping around it,"

Not very likely to be damaged, except for filters and pumps in a structure.

    Bookmark   July 16, 2011 at 2:06PM
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brickeyee, the damage isn't just contained to house when the fire department is fighting a whole house fire. Fire trucks may drive around the property; firemen are dragging their hoses and equipment through the area and disbursing large amounts of fire debris outside the home. Firemen can do significant damage inside and outside the home.

I have seen swimming pools completely filled with burnt debris. Those pools make a nice little water supply if the fire fighters need water to fight the fire too. If the pool is close enough to the house and the house needs to be bulldozed and excavated for a new foundation, the pool may be a victim.

The chances are slim that you would need to replace the entire pool but the chances are also slim that you would suffer a major house fire too.

    Bookmark   July 16, 2011 at 3:43PM
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It is really hard even for the FD to do damage to a buried pool and hardscaping.

Clean up of debris does not produce damage (unless you hire the low bidder who wants to use his bobcat for everything), and few FDs are going to driven anywhere near a pool for fear of the soil giving way beneath the truck.

For the most part trucks are not driven off hard surfaces.
Their weight and ground loading are very high resulting in them easily becoming stuck.

You have greatly exaggerated the risk.

Live landscaping is easily damage by the heat from a major fire, and the clearing that may occur to ensure the fire is completely out (as in cut it down, pull it out, douse with water).

I have restored a number of houses that had fires over the years.
One of the worst ended up with a completely water filled basement.
Pump some, remove some debris, repeat as required.

    Bookmark   July 17, 2011 at 10:47AM
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"Pump some, remove some debris, repeat as required." OMG, to think a multibillion yearly commerce in restoration has been doing it all wrong. You need to speak at the next national conference and make this information public. I sure feel foolish for following proven scientific industry protocol after all these years. Since insurance companies rarely spend money on property claims needlessly, you might want to inform them too. Your methods will save so much money on insurance claims that insurance premiums could be lowered 90% or more. I bet with your methods, insurance premiums will no longer even be necessary. You are onto something here Brickeye, I would run with it! Sorry, I had to put in my 2 pennies and no I wont go back and forth arguing about it.

    Bookmark   July 17, 2011 at 8:00PM
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