Insurance companies have formulas to calculate the maximum they will insure a house for in order to protect themselves from the arson for profit crowd. That may limit how much insurance you can get. Sounds like it is time for a talk with your agent.

You normally insure for replacement cost.

Your build cost may be lower.

If it is higher you need to make sure you have adequate coverage.

While unlikely to be as much of an issue with new construction, on older houses depending on how much damage occurs you can be forced to bring things up to present code.

This can limit the ability to rebuild on the foundation of a damaged house.

There is insurance available that will replace with 'like kind' and cover bringing a rebuild up to the present code.

I live in the land of wildfires - southern CA - and this is a constant hot topic around here.

In 2003/2004 we did a major down-to-the-studs renovation and addition, and when it was finished, we had to argue with the insurance company about the replacement value of our house.

The replacement cost that the insurance company's formula calculated for our house was WAY below what we had just spent on our construction (if I recall, the renovation/addition cost us $700,000 and they valued the house at around $360,000). We went back and told them that, having just completed a down-to-the-studs remodel, we knew exactly what replacement of our house would cost and that their formula (which used a standard dollar amount per square footage, also factoring in number of baths and bedrooms) was insufficient. At that time, the 2004 San Diego wildfires were a fresh memory, and there were reports galore in the local papers about the massive number of people who were underinsured and had lost homes whose replacement values had not been updated with their insurance companies in years. These people were out of luck - many owned a charred plot of land but could not afford to rebuild.

One of the problems is that the area we live in, which is near the beach, and is not populated with mega-mansions but instead small-ish beach cottages, does not fit into the formula because the square footage is not there. The insurer did not expect that a 1900 sf house would cost $700,000 to rebuild, but we knew better, having just done it.

After lots of back and forth with our insurance company, we finally convinced them that our first priority was getting the right amount of coverage and we realized we'd have to pay an additional premium for the proper coverage (of course, we shopped around for the best deal, but it was as if they were all just trying to attract us with the lowest premium possible). It was clear that insurers assume everyone is price shopping and solely looking at which premium is lowest regardless of coverage. Finally the insurance company that we've been with for years sent a person to our house to videotape the interior and exterior and came back to us with the updated replacement cost that was in the ballpark of what we had just paid to have it rebuilt. In order to get close to what we wanted for replacement cost coverage, they had to add what they referred to as a "quality" factor to their formula that accounted for upgraded stone, wood floors, appliances, etc. The new formula produced a reasonable replacement cost and the additional premium was not as much as we feared it would be (maybe 25% or so if I recall).

Obviously, it's also important to keep updating the replacement cost when the policy renews each year. Ironically, now that we're living in a different house and doing another renovation/rebuild/addition, we're finding that construction costs are way down from those years, and so the replacement cost for our current house will probably be the same as our former house, even with a lot more square footage, in the same area.

During this process, we also learned of an insurance term, "guaranteed replacement policies" that supposedly allows a homeowner to get the exact house rebuilt (minus code upgrades) regardless of cost. These guaranteed replacement policies are rarely offered by insurers anymore. I think there are only a couple companies in CA that offer them at this time, probably because of the rapidly escalating cost of construction during the real estate boom years and the difficulty in annually recalculating the cost to rebuild and therefore, the premium they'd need to charge.

Bottom line is, I would always insure a home for what it recently cost you to rebuild it - yes, perhaps the foundation would still be there, but how much is that? Having heard so many horror stories around here with people having to drag their insurance companies in to court and battle it out for years before they can rebuild, I am convinced that it's easier (and cheaper!) to just insure your house for what you think it would cost to rebuild and then make sure it's updated annually according to construction costs in your area.

Best of luck.

The insurance company told me what they wanted the house insured for ($804k, I believe). I told them that was high - it didn't cost close to that amount to build plus the house wouldn't sell for that amount (with the land) but they explained to me there are a lot of things you don't consider when a house is a total loss. And that is what that amount it supposed to cover. It has to cover demolition, removal of debris, temporary power, architect and engineering fees (codes change) plus rebuilding. Also, we built our house ourselves, but if anything were to happen I would hire a GC (DH or I could GC it, but the insurance company won't pay us to do it, so might as well let someone take the time). I still think $804k is high, but it's not worth fighting with them about. I have guaranteed replacement, but I don't live in a high risk zone (no wildfires, flash floods, mud slides, hurricanes are even exceeding rare and don't cause full loss 3 miles inland around here). I believe they used about $200 a sf for mine.

Wow, ya'll brought up a lot of things I never even considered. I was trying to keep my payment low but was afraid I was going too low...never occured to me that people would go too high and burn the place down. It helps me understand where the insurer is coming from a bit better.

I also didn't consider demolition, debris, etc.

My house is a log home so it's more expensive to build per sf than normal. On the other hand, I guess it could be more risk...I talked to one insurer today and they won't even insure log homes. But my normal insurer is giving me a pretty good rate.

No excessive danger of floods, wildfire, hurricanes, etc.... a ridge in the Shenandoah Valley... so I don't have to worry about that.

The insurance company said they would have to send out an adjuster to inspect and verify the rebuild amount so I guess that's my opportunity to talk to them and work it out.

One more thing that I need to understand. I was taking notes as fast as I could but I think I heard the rep say that there's a 25% upwards adjustment to account for actual replacement costs. Ring a bell? Guess I need to talk to them again to understand it better.

So glad to have this board to know what questions to ask!