Personal Insurance Blog

Why did my insurance coverage increase when the value of my home decreased?

This is a very common question posed to insurance agents. Not a week goes by without homeowners reading or hearing  about the dismal real estate market. In fact,  prices dipped an average of 6%  nationally last year.  This makes it easy to understand why the homeowner is puzzled when the amount of coverage for their home increased from the previous year. 

“Last year my home was insured for $300,000 and now it is insured for $318,000?”

The reason that the amount of insurance coverage changed is that this coverage reflects  the estimated cost to rebuild your home, not what someone would pay for your house. Many of the insurance companies automatically increase the building coverage to guard against inflation.   Although the real estate market is in a slump , the cost of building materials continues to rise.  Over the past year, the US Department of Labor estimated the net increase for all residential building components to be 6.7%. Some of the increases include: asphalt roof shingles- +15%, copper for plumbing-+15%, fabricated metals-used for heat  and air ducts +4%, fuel for transporting these goods- + 39%. 

Construction Cost

Another  reason that coverage for the dwelling increases is that it simply costs more to reconstruct an existing home than build a new home. If you are building a brand new home today, you will find new construction costs are favorable. Contractors are shaving profit margins and select less costly materials when demand for new housing stock is down. In addition, new home financing is attractive and labor rates have been fairly stable. 

It’s a different scenario when you rebuild a home after a partial or total loss.  Typically, there is an urgent need to get the work done and the family back in the home.  It is not unusual for a partial or total insurance  loss to call for  the expertise of a restoration contractor. This may involve  water and mold mitigation, demolition, matching up finishes along with construction. In addition, restoration contractors usually need special equipment that new home builders do not. Lastly, if rebuilding after a loss, the contractor  may not have the option of choosing less expensive components that are available for new home builders. 

You can see determining the appropriate insurance amount can be more complicated than merely looking at real estate sales figures in your neighborhood. Our agency takes the time to review properties to assure they are insured properly. We do this not only for policies being issued for the first time but importantly we check on values for existing customers. Sophisticated software tools enable  us to estimate these amounts.  It’s important your agent keeps you and your property insured to the right value. For more information check out our insurance resources and whiteboard video series. Learn more about homeowners insurance here.