When purchasing a newly constructed home most Policyholders consider the purchase price of the home as the amount of coverage needed for their insurance policy. After all, the home was just built and except for the cost of the lot, the purchase price should accurately reflect the cost to build the house. While this does seem to be a reasonable and practical approach, insuring a newly built house for its construction cost “new” may not provide an adequate amount of coverage to reconstruct that same house in the event of a severe loss.
Regardless of a home’s age, when rebuilding a home with severe damage there are costs associated with reconstruction that are not part of the original construction costs. As a result, these reconstruction costs need to
be included in the insurance value to ensure adequate coverage to completely rebuild the house. Cost incurred to reconstruct a home include:
Economies of Scale
New construction: New homebuilders often realize great savings in the mass purchasing of building materials. Contractors may be building many houses at the same time and can purchase materials in bulk at cheaper prices. Most of these materials will be commonly used throughout all the homes they are building.
Reconstruction: A reconstruction contractor, rebuilding a single home typically will not receive these savings. Materials for the job are unique and specific to the home and therefore, are usually more expensive due to the lack of mass purchasing power. … (Full article HERE – PDF)
