This is sometimes a very difficult question to answer. The first thing to remember is that you are only insuring the physical structures. You are not insuring the land. If you are a first time homeowner and purchase a home for $500,000, you do not necessarily need to buy $500,000 of coverage for the home.
Determining the cost to rebuild your home and appurtenant structures is something that should be discussed with an agent who specializes in homeowners insurance. PIA utilizes two software packages to determine the replacement cost of your home. There are several factors that will determine the homes cost to rebuild.
The reason this is so important is due to the fact that homeowners policies can contain co-insurance clauses or can have maximum limitations on how much coverage the home has. Although most policies contain a replacement cost endorsement, that endorsement may require the home to be insured for a 100% of the replacement cost. And the replacement cost endorsement may cap the amount paid in the event of a covered claim to 125% of the replacement cost stated in Coverage A of the policy declaration page.
When the Oakland Hills Fire hit, the claims settling process was a nightmare for most insurance companies. Almost all of the homes were under insured. Custom homes that cost $450,000 to rebuild were only insured for $225,000. They were underinsured because the homeowner had not notified their agents of upgrades done to the home. However the largest problem came from agents who insured homes for less than replacement cost value. By lowering the replacement cost value the agents were selling lower premiums. The agents were also advising their clients not to worry since they had “replacement cost” coverage. PIA does not condone this practice and it is not something we allow.