We know that 2015 wound up being a tempestuous year for the Alberta housing market, and with Calgary, Edmonton and other municipalities around the province sending out their new tax assessments to start 2016, many owners have been told their homes are now worth a few thousand dollars more or less than they were at this time last year.
This tax assessment gauges the value of your home based on the value of the land and what similar homes – those of approximately the same size or with the same number of rooms – in the area are selling for on the open market. It’s a number that matters intimately to you when a percentage point change can represent thousands of dollars in value of what is likely the most expensive purchase you’ll ever make. But when it comes to your home insurance, it’s a number that doesn’t really mean much.
It doesn’t? Why not?
You see, your home isn’t insured based on what it would cost to buy it if it was up for sale. It is judged by “replacement value” instead of “market value.” That means that the insured value of your house isn’t determined by factors like the cost of land or the going rate of similar houses in the area.
So then what is it based on?
Your home insurance instead covers the value to rebuild your house if the worst should happen. That means you’re covered for the costs of things like tearing out or removing debris from a destroyed home and the cost of labour and materials to rebuild your home in what’s called “like kind or quality” which means not just replacing it with the cheapest or most readily available materials, but instead making sure the home you get back measures up to the one that suffered damage. It also provides coverage for lost or damaged contents within a home.
These reconstruction costs can differ greatly not only from the market value for the house, but also from the cost of building a new home from scratch. Costs from demolition and removal of damage or protecting an undamaged part of your house, as well as factors such as replacing the upgrades you have installed in renovations and the rush to rebuild a house can all increase the cost of rebuilding your home and should all be accounted for when insuring the value of your home.
Does that mean the replacement value of my house always stays the same?
Well, it means the replacement value of your house won’t go up and down with the changes in the real estate market. But those other factors we talked about can still cause the replacement cost of your home to fluctuate. The cost of building a home can go up when labour and materials become more expensive. And as you tailor your house to you, those renovations can make a big difference in the cost of rebuilding your house.
The replacement value of your home insures it to be rebuilt in “like kind and quality,” so if you finish your basement, that will cost more to rebuild than when it was just an empty bottom floor. Marble countertops or one of those cool showers that fog the glass when it turns on are going to cost more to replace that the standard counters or showers a builder might put in. And the cost of replacing your home is also subject to the ups and downs of the prices of those specialty items. So if, for example, a landslide in Romania wipes out roads to the Poiana Rusca mountains, driving up the price of the pinkish-tinged marble quarried there, that could drive up the price of those marble countertops.
Then how do I make sure my home has enough coverage?
There are a few ways to make sure that you’re fully covered for the worst-case scenario. For starters, your insurance policy likely builds inflation in the replacement cost of your home into your yearly renewal process. This should account for the basic rising costs of materials and labour as they become more expensive over time. Additionally, your policy will require a new home replacement cost evaluation to be done on your home every three years.
Finally, if you are undergoing a renovation that can alter the value of your house, you need to tell us about it. Your insurance company may also require notification on any renovation project that could increase the value of your home by five per cent or more. Minor renovations such as painting a room wouldn’t be a factor in this case, and other changes that may affect a house’s resale value such as replacing the windows or putting in a new furnace normally wouldn’t either. If, however, you were to build a window in a wall where there wasn’t one before or add a second furnace to your home, those changes could up the replacement value of your home. Renovations such as finishing a basement, gutting and redoing a kitchen or replacing carpet with hardwood floors throughout your home are all the sorts of changes that could mean your house should be reevaluated.