Services for Real Estate Pros with Peter Tuttle, CPA, CLCS


Is the amount of property insurance on your home correct? What is the
appropriate amount of coverage for your home? To begin with, it should be
insured for at least 80 percent of its replacement cost when covered under
a standard homeowners policy. Replacement cost refers to the amount
necessary to repair or replace damaged building parts with items of like
kind and quality. Some insurance companies even require 90 percent or
higher figures when the guaranteed replacement cost option is offered.
With this option, the policy pays the full cost of replacing your home,
without any depreciation and often without a maximum reconstruction
payment. (This gives you added protection if there is a sudden jump in
construction costs due to a major shortage of certain building materials.
Construction costs often "surge" following large catastrophes, such as
hurricanes.) Note that guaranteed replacement cost coverage approaches can
vary by state and are not even available in every state.

Many homes are either underinsured or overinsured. For example, some homes
insured for long periods of time with one insurance company may have
inadequate limits of insurance due to increased building costs. In many
cases, homes have been remodeled and improved, and this information has
not been conveyed to the insurance agent or company, resulting in severe
underinsured home values. If your home is underinsured, you not only have
inadequate protection for total losses, but you may also lack full
protection for smaller losses.

Sometimes homes are mistakenly insured for their market value. However,
market value is normally not indicative of the home's replacement cost.
For example, market value also reflects the cost of the foundation and the
nondestructible land value, both of which normally survive intact if the
house burns to the ground and has to be rebuilt.

In addition, some homes may be insured improperly to meet mortgage company
requirements. Some mortgage companies require the amount of insurance be
at least equal to the mortgage balance on the house. The mortgage balance
is also not reflective of the home's replacement cost, which is often
considerably more but can also be less. Insurance companies and agents
often struggle in properly educating mortgage companies about these
distinctions, but there is nothing to prevent you from insuring to actual
replacement cost if that is indeed greater than the mortgage balance. The
problem occurs when the mortgage balance is greater than the replacement
cost, which will result in the purchase of a higher limit than needed.

The bottom line is that you should work with your insurance agent to
determine the correct replacement cost and resulting insurance limit for
your home. Most agents use sophisticated replacement cost estimating
packages that can fairly and accurately determine the replacement cost
value of your home. Factors that these programs use to determine this
figure include the following.

* Square footage of the home, including its configuration

* Construction costs for your community

* Exterior wall construction type, including frame, stucco, brick, or
brick veneer

* Style of home

* Number of bathrooms and bedrooms

* Roof type

* Attached garages, fireplaces, built-in cabinets, and other special
features, such as hardwood floors

The more advanced replacement cost estimating programs require detailed
information to improve the valuation estimate. For example, a
rectangular-shaped home with 1,800 square feet will have a much lower
replacement cost than a similar-sized home with an "L" shape. In other
words, the better cost estimating programs require information about the
number of corners in the home. The more detailed information your agent
asks about your home, the more confidence you can place in his or her
recommended limit of insurance.

As a final note, you should request an annual review of your homeowners
policy to keep up with increasing building supply and labor costs. Also
ask your agent about the advisability of adding an "inflation guard"
endorsement to your policy or about the availability of guaranteed
replacement cost coverage to help assure that your home is properly

This article is brought to you by Peter Tuttle, CPA at Cool Springs  You may contact me by sending an e-mail via the link to the right of my active rain blog page.  Please visit my website at

"I help individuals, families, small-businesses & non-profits with their income tax & insurance needs."

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Comments (2)

Chuck Carstensen
RE/MAX Results - Elk River, MN
Minnesota/Wisconsin Real Estate Expert

I have heard horror stories of under insured homes. The agent I refer normally gets people on a guarenteed replacement program.

Jun 20, 2008 04:49 AM
Larry Brewer - Benchmark Realty llc
Benchmark Realty LLc - Nashville, TN

Peter - It's good to hear from you, I thought you may have taken the summer off. THis is good advise, and I know that it's not something that most people think about.

Jun 20, 2008 07:16 AM