Today we approach a common occurrence for a home buyer:
Your offer (or “bid” for you Wall Streeters) was just accepted on your home purchase. Your lender has requested a binder for homeowner insurance prior to scheduling the closing. Now what? What makes up proper Replacement Cost coverage for the dwelling or structure?
We believe appropriate coverage would begin by first determining the cost to rebuild the structure, with attention to flood zone proximity, distance from tidal water, elevation and distance from nearest fire department and any other specific geographical exposures. Oh, and the age and architecturally unique features of the structure.
Key point: The purchase price or Market Value is not necessarily equal to Rebuilding Cost. So, unless the policy provides a “rebuilding guarantee” to help reduce your financial risk, we would suggest adding some Extended Replacement Cost limits; this is usually stated as a percentage (e.g. 25% or 50%). The older the home, the more important Ordinance of Law* becomes; this should also be included.
* Ordinance of Law is a local zoning requirement that could add stipulations on modifying or rebuilding a dwelling or home; this could greatly modify (upward) associated costs.
Other coverage such as sewer/water backup and earthquake insurance could be and is commonly added to home policies. Some carriers are now offering flood insurance that has broader coverage than the FEMA National Flood Insurance Program (NFIP). Two relatively new riders often offered are “Equipment Breakdown” and “Service Line”.
This all comes down to a Risk Management question: How much financial risk are you willing to accept?
When the policy is fully structured, it would include 3 main property coverages as well as comprehensive personal liability and other necessary amendments to properly cover the exposures of the new homeowner. We will cover more of these in our next post.