For new homeowners, or homeowners looking to re-evaluate their home insurance coverage, you may be asking a few key questions surrounding home insurance, particularly home replacement cost. Here’s a look at commonly asked questions about home replacement cost and insurance coverage for your home:

What is home replacement cost?

Home replacement cost refers to the estimated price of rebuilding a home after a total loss. This entails factors such as local construction costs based on labour, materials, and other pertinent items. The estimate is based on a new construction estimate to replace the residence with a house of equal or similar level of quality. Replacement costs estimates are not necessarily the same as the market value of a home.

How do I calculate the replacement cost of my home?

It’s important to understand that rebuilding costs and a property’s value are mutually exclusive. To calculate replacement cost, you will need to know the square footage and multiply that times the local cost of new construction. With that base figure, additional costs such as specialty materials, permits, fees, razing, specific home design, number of floors, and many other items must be taken into consideration. Each home has unique aspects that drive costs.

How do you measure for total square footage?

To measure for square footage of your home, always the exterior of the perimeter walls, calculating for angles, possible upper level overhangs which are finished living space, but not below grade level / basement level.

What is the 80% insurance rule?

Insurance companies may not reimburse the full amount of rebuilding unless a homeowner has taken out a minimum of 80 percent of the structure’s estimated total replacement cost. This remains a significant issue for homeowners who make home improvements without increasing their insurance. In the event of a loss, you may not be fully reimbursed.

Will my house insurance keep up with rising costs?

While it’s true that home insurance tends to increase each year, that does not necessarily have to be the case. Among the primary drivers behind increased insurance premiums is the rising cost of construction. When things such as materials and labour uptick, those costs are factored into replacement. Your rising insurance premiums reflect the construction sector. If material costs decrease or there is a surplus of qualified workers, it’s possible your insurance rate could remain static.

What if the amount I insure my house for is too low?

Being underinsured is a common mistake. This often occurs when a property owner secures insurance that covers the loan, but not necessarily rising replacement costs. If your coverage is below the actual replacement cost after a loss, expect to pay the difference out-of-pocket. It’s essential to know your total replacement cost and be fully covered.

Do I need to list, or specify, contents on my policy?

A homeowner can secure a policy that reimburses for the contents based on the value of commonly owned items. Some policies offer new-for-old, which means you would be reimbursed for an item at today’s retail cost. If you have high ticket items such as jewelry, rare collectibles, and others, it may be in your best interest to keep a record. Insurance policies generally have a maximum payout limit.

How do I estimate building costs?

A rough estimate can be derived from calculating the structures square footage and multiplying that by local construction costs. But to get an accurate new construction estimate, home design, the number of floors, labour availability, permits, fees, and other moving parts must be pulled together. It’s essential to work with a residential cost guide to bring together all the salient cost drivers.

How do you calculate residential construction costs? 

Estimating new home construction involves bringing together many different costs. Key factors usually include home design, floor plan, materials quality, labour costs, permits, fees, and amenities, among others. Because costs often differ from region to region, construction sector professionals generally rely on a residential cost guide to calculate an accurate estimate. This often helps industry professionals to avoid overruns.

What is the construction cost per square foot?

This is a basic cost estimate of how much new construction costs average in each region. It’s vital for non-construction sector professionals to understand that replacement costs cannot be accurately arrived at based on this general average. Actual construction costs involve bringing together all the items included in rebuilding a home.

How do insurance companies determine the replacement value of your home?

Insurance professionals work diligently to bring together a checklist of items that relate to rebuilding a home after a total loss. These items include the year of construction, location, improvements, foundation, roof type, home design, square footage, and many others. Because each home has unique cost drivers, it’s a common practice for insurance professionals to work with a residential home replacement guide to get an accurate estimate.

What is a replacement cost estimator?

Industry professionals sometimes call this an RCE. This highly specialized guide pulls together all the critical cost drivers necessary to rebuild a home to its former quality. The Douglas Residential Cost Guide remains the Canadian industry standard and is widely used by home and property owner, insurance and construction sector professionals.

Which is better replacement cost or actual cash value?

It’s crucial to understand that the terms “replacement cost” and “actual value” are often vastly different. Actual value generally refers to the depreciated value of the residence or structure or more appropriately stated the estimated replacement cost new less/minus the estimated, applicable physical depreciation. Replacement cost refers to how much it would cost to rebuild the home. It’s not uncommon for new construction estimates to exceed the market value of a home. See our insightful blog to learn more about “What is the difference between replacement cost and actual cash value”.

Can you have replacement cost with an agreed value?

The short answer is: Yes. Industry professionals widely use the Douglas Residential Cost Guide to determine replacement cost value. When insurance, construction, and other home industry professionals utilize this resource, they can arrive at the same replacement cost value or clarify any differences.