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Shedding Light on Reconstruction Costs

The 2018 Camp and Woolsey Wildfires in California caused devastating losses between $15 and $19 billion, according to a CoreLogic Natural Hazard Press Release. In a blog titled “Explaining to Homeowners Reconstruction Costs Versus Other Valuations, [1]” Guy Kopperud, Principal of Industry Solutions at CoreLogic [2] discussed several aspects of reconstruction costs vs. other valuations in the wake of damage caused by recent natural disasters.

Kopperud noted that natural hazards such as wildfires have forced insurance carriers to reevaluate the need for more accurate insurance coverage to better protect their policyholders if a natural disaster should destroy their property. Speaking of the consequences of underinsurance, he said that it can “affect the mortgage industry as well.” “Many times, if a homeowner doesn’t have enough insurance coverage to rebuild, they simply walk away from their mortgages,” he added.

The effects of natural disasters were evident in CoreLogic’s data on delinquency, wherein the areas affected by natural disasters have seen an increase in delinquency rates while other parts of the country are experiencing a steady decline, he noted.

While the focus of insurance and mortgage industries is largely on making Insurance to Values more accurate, Kopperud emphasized that property insurance agents and carriers often receive questions from homeowners who lack clarity on reconstruction cost values and market or appraisal values.

Property owners ask three most common questions after receiving a quote from their agent, says Kopperud. One of them pertains to why their homeowner’s insurance coverage is more than what the home is worth. “Many homeowners assume the cost to rebuild a property should be equal to what they paid for the property. However, insurers determine reconstruction cost values (RCVs) using sophisticated residential estimating tools that deliver RCVs at today's prices,” he said.

Answering the aforementioned query, Kopperud explains, “the reconstruction cost value is the cost to replace or rebuild a home to original or like standards at current material and labor costs within a certain geographical area. Meanwhile, a home’s market value is the price a consumer is willing to pay for the home.”

Addressing questions about why the reconstruction cost value is higher than what was initially paid for the home, Kopperud said that “CoreLogic research has shown that reconstruction cost values average close to 12 percent more than new construction costs. This is because newly constructed communities can benefit from material discounts and labor efficiencies that a contractor rebuilding a home does not have.”

To those homeowners who inquire about using the appraised or assessed value to determine their insurance coverage limits, he indicated that Replacement Cost New (RCN)—a term generally used by the assessor and appraisal industry—is not recommended to determine the cost to rebuild a home. He further explains that this is because RCN is based on the cost to build, at one time, an entire building of equal utility, quality, features, and finishes with neither the contractor nor property owner being under duress to have it done in a shorter time frame.