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Many Arkansas homeowners assume their homeowners insurance automatically keeps pace with rising construction costs.
Unfortunately, that is not always the case.
If your policy has not been reviewed recently, the amount of dwelling coverage shown on your policy may no longer reflect what it would actually home replacement cost to rebuild your home after a major covered loss.
At My Neighborhood Insurance, we help homeowners in Farmington, Fayetteville, Prairie Grove, Lincoln, and throughout Northwest Arkansas review their homeowners insurance and make sure their coverage reflects their home as it exists today.
Market Value and Rebuilding Cost Are Not the Same
One of the most common homeowners insurance misconceptions is that your home’s market value and its rebuilding cost should be the same.
They measure two different things.
Market value is influenced by factors such as:
- The value of the land
- Neighborhood demand
- School districts
- Location
- Local real estate conditions
- Comparable home sales
Replacement cost focuses on what it may cost to repair or rebuild the physical structure of your home using materials and workmanship of similar kind and quality after a covered loss.
A home that sells for $350,000 does not necessarily cost $350,000 to rebuild.
The rebuilding cost could be higher or lower depending on the size of the home, construction type, materials, labor costs, local contractor rates, building requirements, and other factors.
That is why dwelling coverage should generally be based on an estimated rebuilding cost rather than simply your home’s purchase price or current real estate value.
Why Does the Cost to Rebuild a Home Change?
The cost of rebuilding a house does not remain fixed.
Several factors can change the amount required to reconstruct your home over time.
These can include:
- Higher construction labor costs
- Increased lumber and building material prices
- Roofing and siding costs
- Changes in contractor pricing
- Updated building codes
- Increased demand for contractors after major storms
- Changes to the size or features of your home
- Higher costs for custom finishes
Even if you have not moved, your insurance needs may have changed considerably since you first purchased your policy.
Home Improvements Can Increase Replacement Cost
Renovations are another important reason to review your homeowners insurance.
Consider improvements such as:
- A kitchen remodel
- A bathroom renovation
- A room addition
- A finished basement
- New hardwood or premium flooring
- Custom cabinetry
- Upgraded countertops
- A new deck or covered patio
- A detached garage, workshop, or shed
- Major electrical or plumbing upgrades
These projects may increase the amount required to rebuild your home.
If you complete a major renovation and never tell your insurance agent, the information being used to estimate your dwelling coverage may no longer accurately describe the property.
It is a good idea to contact your insurance agent when you make significant changes rather than waiting until a claim occurs.
What Is Dwelling Coverage?
Dwelling coverage, often listed as Coverage A on a homeowners policy, helps protect the physical structure of your house after certain covered losses.
Depending on the policy, this can include parts of the home such as:
- Walls
- Roofing
- Flooring
- Built-in cabinets
- Attached structures
- Electrical systems
- Plumbing systems
- Heating and cooling systems
Your dwelling limit is one of the most important numbers on your homeowners insurance policy because it can affect how much protection is available if your home suffers extensive damage.
The goal is not simply to match your mortgage balance or real estate value. The goal is to estimate what rebuilding the insured structure could cost.
Why Severe Weather Can Affect Rebuilding Costs
Northwest Arkansas homeowners face property risks that can include wind, hail, severe thunderstorms, lightning, and other storm related damage.
A major storm can also affect rebuilding costs beyond the immediate physical damage.
When many homes are damaged at the same time, demand for:
- Roofers
- General contractors
- Electricians
- Plumbers
- Building materials
- Temporary labor
can increase quickly.
This can make repairs and reconstruction more expensive than they would be under normal market conditions.
Reviewing your dwelling coverage before a major loss can help you better understand whether your policy reflects current rebuilding conditions.
What Is Extended Replacement Cost Coverage?
Some insurance carriers offer extended replacement cost coverage or similar additional protection.
Depending on the policy, this type of coverage may provide an additional amount above your listed dwelling limit when the cost of rebuilding after a covered loss exceeds the original estimate.
For example, a policy could provide additional protection based on a percentage above the dwelling limit.
Availability, percentages, conditions, and terminology vary between insurance carriers.
Extended replacement cost coverage should not be viewed as a substitute for maintaining an accurate dwelling value. It can instead provide an additional layer of protection when rebuilding costs unexpectedly rise.
Ask your agent whether your current homeowners policy includes this type of protection and how it works.
Do Building Code Changes Affect Rebuilding Costs?
They can.
If an older home suffers major damage, rebuilding may require parts of the structure to comply with current building codes.
Depending on the home and local requirements, this could involve changes to:
- Electrical systems
- Plumbing
- Roofing
- Structural components
- Energy efficiency requirements
- Other construction standards
The additional cost of complying with updated ordinances or building codes may not always be fully covered under basic dwelling coverage.
Some homeowners policies offer ordinance or law coverage to help address certain additional costs.
This is another item worth discussing during a home insurance review, particularly if you own an older property.
Replacement Cost vs. Actual Cash Value
Replacement cost and actual cash value are also important concepts to understand.
Replacement cost coverage generally focuses on the cost of replacing damaged property with new property of similar kind and quality, subject to policy terms and limits.
Actual cash value generally considers depreciation based on factors such as age and condition.
The difference can significantly affect how much you receive after a covered loss.
You can learn more in our guide to Replacement Cost vs. Actual Cash Value.
It is important to review not only how your home itself is insured, but also how your personal belongings may be valued after a loss.
What Should You Review on Your Homeowners Insurance Policy?
A homeowners insurance review should involve more than checking the premium.
Important areas to review include:
- Dwelling coverage
- Other structures coverage
- Personal property limits
- Personal liability limits
- Additional living expense coverage
- Deductibles
- Wind and hail deductibles
- Replacement cost provisions
- Extended replacement cost options
- Ordinance or law coverage
- Water backup coverage
- Equipment breakdown coverage
- Scheduled valuables
- Recent renovations
- Home additions
- Detached structures
- Roofing updates
Your coverage should reflect the home and property you own today, not simply the information that was entered when the policy was first purchased.
Do Not Forget Other Structures
Changes outside your main home can also affect your insurance needs.
Tell your agent if you add structures such as:
- A detached garage
- A workshop
- A storage building
- A fence
- A large shed
- A gazebo
- Other permanent structures
These are generally handled separately from the main dwelling under the other structures portion of a homeowners policy.
Coverage limits vary, so significant additions should be reviewed.
How Often Should You Review Your Homeowners Insurance?
Reviewing your homeowners insurance at least once a year is a good practice.
You should also consider a review whenever:
- You complete a renovation
- You add square footage
- You replace your roof
- You build a garage, shed, or other structure
- You purchase expensive personal property
- Construction costs change significantly
- Your premium changes substantially
- Your household or use of the property changes
An annual review gives you an opportunity to update property information and understand whether your current policy still fits your needs.
If you also have auto insurance, this can be a good opportunity to review both policies together. Our guide to bundling home and auto insurance explains some of the factors to consider when comparing bundled and separate policies.
Why Work With an Independent Insurance Agency?
My Neighborhood Insurance is an independent insurance agency, which means we can compare homeowners insurance options from multiple insurance carriers rather than offering coverage from only one company.
Different carriers may use different:
- Replacement cost estimation tools
- Coverage limits
- Deductible options
- Extended replacement cost provisions
- Optional endorsements
- Underwriting guidelines
- Discounts
- Pricing
Our team can help review the details of your home, identify changes that may affect your insurance needs, and compare available options.
We serve homeowners in Farmington, Fayetteville, Prairie Grove, Lincoln, Greenland, West Fork, and communities throughout Northwest Arkansas.
Would Your Policy Rebuild the Home You Own Today?
The home you insured several years ago may not be the same home you own today.
You may have remodeled the kitchen, replaced the roof, added a room, upgraded the flooring, built a detached structure, or made other improvements.
At the same time, the cost of labor and construction materials may have changed.
Your homeowners insurance should reflect those changes.
If you have not reviewed your policy recently, now is a good time to look at your dwelling limit, replacement cost estimate, deductibles, optional coverages, and recent improvements.
Call us at 479-935-1817 or contact My Neighborhood Insurance in Farmington, AR to request a homeowners insurance review or quote.
We can help you review your current coverage, update important information about your home, and compare homeowners insurance options from multiple carriers.