We see it time and time again. A brush fire destroys numerous homes yet people don’t have enough insurance to rebuild their homes. How is that possible? Doesn’t the insurance company make sure the coverage is adequate? Well, not exactly. In California, it’s the homeowners’ responsibility to ensure that they are carrying enough insurance to rebuild their home. Home replacement costs can vary a lot. The typical cost to rebuild a home after a fire can range considerably from $200 to $1200 per square foot, depending on finishes, construction type, etc. (those fancy heated toilets you installed are expensive!)


The biggest risk is when homeowners are told not to worry because of “extended replacement cost.” Most carriers offer some “cushion” of 125% to 150% of additional coverage if it’s needed. There are two problems with relying on extended replacement cost. One, most policies have a “co-insurance” clause which penalizes you if you don’t carry enough insurance to rebuild the home. This means the insurance company can penalize you even on small losses for not insuring for the “full value” of replacing your home. For the second reason, look no further than Santa Rosa, CA. With 3,000 homes destroyed in one city, there is no doubt the cost of construction, labor, etc. will skyrocket. A scenario like Santa Rosa is exactly what extended replacement cost is for.


So, what do you do? Well, if you are a contractor or work at Home Depot, you might have a good idea what the replacement cost is. But, assuming that’s not the case, it’s best to discuss with your insurance agent. By state law, your insurance agent must provide you with something called a “replacement cost estimate sheet”. This sheet is a computer program generated estimate of the cost to replace your home based on square footage, construction type, wall type, carpet type, etc. By taking a few minutes to complete this with your insurance agent you can ensure your home is insured for the right amount.


If your policy is over 5 years old, it’s probably outdated and inadequate as materials costs and construction costs continue to outpace inflation. During this review process, you can also ask your agent if you are missing any “optional” coverages like water back-up, mold, earthquake, etc. Doing your homeowners insurance the right way might cost you a few dollars per month but it well worth the expense (and, I hear the Frappuccino’s at McDonald’s taste just like Starbucks).