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When establishing a value on a building, consideration must be given to the actual reconstruction cost of the building. When Insurance Companies are involved in re-construction, such things as site accessibility, zone restrictions, overtime, location and by-laws impact the cost to rebuild. Generally small or large Home Building Companies have cost advantages, which Insurance Companies do not have. When constructing a number of homes in a new area, the costs of construction are diminished due to economies of scale.
Keep in mind that if your Insurance Limit is below 80% of its replacement cost, you will not receive full payment of your loss. This is known as a co-insurance penalty which is part of some insurance contracts.
Example A: A Homeowner buying a new home in a new subdivision for $250,000 excluding land should take into consideration that should a total loss occur at a later date, Insurance Companies are faced with new challenges such as site accessibility, zone restrictions, overtime and by-laws. Statistics indicate that due to these challenges, Insurance Companies can face extra expenses of 15%, therefore suggesting an Insurance value of $287,500.
Example B: A Homeowner decides to build his own home and incurs material cost of $200,000. Depending on the time spent at finding the best deals including discounted if not free labor; establishing a Reconstruction Cost for this scenario is very difficult. The home must be insured for the market value of the materials and workmanship to prevent a co-insurance penalty.