On August 30, 2018, California Governor Jerry Brown signed a bill designed to protect homeowners. This bill requires personal lines insurance companies to perform a replacement cost calculation for homeowners every other year.
This bill was prompted by a large number of underinsured homeowners who experienced losses in the recent wildfires. These underinsured homeowners found themselves unable to replace their homes with the checks they received from their insurance companies.
What Is A Replacement Cost Estimate?
Your home can have many values:
- Market Value: this is the amount that the home would sell for if it was put up for sale in its current condition. This value is based on other homes in the area, and may fluctuate with the economy or increase with increased demand for homes in a particular area.
- Actual Cash Value: this is the amount it would cost to replace your home with similar quality and materials less depreciation based on the age and condition of the home.
- Replacement Cost Value: this is the amount that it would cost to replace your home with similar quality and materials in its current location to bring your family whole again. The condition is not a factor. This amount may be more or less than the Market Value.
When insuring, you should always insure for the Replacement Cost, since this is the amount that it will take to rebuild the home at the time of the loss. A replacement cost estimate is a valuation calculator that uses the size, building materials, location and age of your home to estimate how much it would cost to replace the home if it was completely destroyed.
What Affects Building Values?
Home valuation can change over time, even over the course of a year. There are many factors that can affect this valuation:
- Depreciation. This occurs gradually over many years, but can also occur if there isn’t proper upkeep of the home.
- Remodeling. If you have remodeled your kitchen or bathroom, or if you have added on to the original structure, this can increase the replacement cost value of your home.
- Cost of construction. Construction is a supply-and-demand business. If there is a shortage of building materials, costs go up. This often happens in the event of large-scale events such as wildfires, hurricanes, and earthquakes. The cost to replace your home will increase if materials or workmen are not available to perform the rebuilding.
Why Is This Bill Important?
It is easy to “set it and forget it” when it comes to insurance. If you haven’t reviewed your homeowners’ insurance coverage in several years (or decades) you may find yourself in a bind when a claim happens.
Requiring replacement cost estimates every other year protects homeowners from large out-of-pocket expenses in the event of a claim. When your home is properly insured, you are more likely to receive the amount needed to replace your home should the unthinkable happen.
If you haven’t looked at your policy in a while, pull it out, dust it off and give Hayes Brokers a call. We’ll be happy to take a look and make sure your coverage limits are where they should be.