Tale of Two Houses

by Daniel Griffin, President of Wesfair Agency, CIC, CPA

One of the most important coverages on your homeowners insurance policy is the “dwelling coverage.” Dwelling coverage is how much insurance you have to rebuild your entire home from the ground up. It’s not the amount of your mortgage, or the market value of your home.

It makes sense when you think about it: the exposure to the insurance company is that they have to rebuild your home—frame to finish—if it burns to the ground. They don’t necessarily care what it’s worth because they’re not looking to buy it off you. They do, however, have to put it back exactly like it was.

Here’s a quick example. There are two homes on the same street; one belongs to the Jones Family, the other to the Martin Family. Both are the same size (roughly 3,000 square feet), both are in the same town and school district, and both have a similar market price (let’s say about $750,000). The neighbors both come into the office and ask for insurance policies and are shocked when they learn the discrepancy in pricing. Why would two homes with so many similarities be so different?

To understand, let’s look a little closer at the two homes. The Jones Family’s home was built in the early 1900s. It has been updated inside, but retains the beautiful fieldstone exterior, a well-maintained slate roof, and fine custom molding throughout the inside. The Martin Family’s home was built in the 1990s. It is a frame home, with a composite shingle roof, and standard interior.

When an insurance company needs to rebuild the Jones’ house, they’re going to need to make sure that they have experienced masons rebuild the edifice. They’ll also need to replace a slate roof, which any owner of this type of roof would agree is a costly job. They might need special contractors who can help to recreate the interior woodworking. It’s likely to cost significantly more than the Martin Family’s home which was built by a company that is still around today.

To avoid issues with replacement cost at claim time, most carriers that we work with will send an appraiser to a home to verify the replacement cost. This hopefully reduces surprises later. I usually think of that process as a selling point that differentiates our carriers.

This example might sound trivial, but it’s a real problem in the insurance industry today. More often, people are relying on websites and quick phone calls to establish this amount on their policy. Most of my new clients don’t even understand fully what the amount means, or what the deficiency could cost them.