Reconstruction Cost

Reconstruction cost, not market value or assessed value, is used by insurers to determine homeowner’s coverage limits and is an important factor in determining a policy’s premium. Because of the many variables involved, the estimating tools that insurers use to arrive at reconstruction costs have become much more sophisticated in recent years.

At its most basic, the purpose of a homeowner’s policy is to restore the home and possessions to the way they were before a loss occurred. Therefore, it is important that the reconstruction cost estimate used to determine the structure replacement coverage amount be as accurate as possible. If the coverage is too low the homeowner may not have enough to cover the losses incurred.

Today’s best practice for reconstruction cost estimating uses information about each home combined with detailed construction knowledge to create an estimate based on methods similar to those used by builders.  Current localized costs of labor and building materials are applied to create a cost estimate that is unique to the home at the time of the estimate. This produces objective estimates without the inaccuracies introduced by subjective quality judgments or unsophisticated estimating tools.

In the past decade, the estimating process that an agent, call center or on-line tool uses has progressed from requiring that the homeowner provide all of the information about the home to incorporating online data resources that pre-fill information about the home. This is particularly useful since a new home buyer may not have all the facts about the home readily available. Incorporating reliable data sources into the process allows the homeowner to simply validate the information and add any additional known features; thus speeding up the quoting process for all parties.