Home replacement costs are soaring as labour and materials get more costly
Michael Kane
Sun
Graham Simms and his newly renovated home in Lynn Valley. The safer home resulted in a reduced insurance premium. Photograph by : Bill Keay, Vancouver Sun
B.C. homeowners are being urged to make sure they have enough insurance to pay for rebuilding if disaster strikes in this era of skyrocketing construction costs and rampant renovation.
Some could find the replacement cost quoted in their homeowner policies is inadequate if it hasn’t been raised to reflect soaring prices for labour and materials, said Lindsay Olson, Pacific region vice-president of the Insurance Bureau of Canada.
Others could be left holding the bag if they’ve failed to notify their insurer about improvements that have added value to their property.
“You should let your insurer know if you’ve added a deck or taken out the wall-to-wall and put in hardwood floors, or whatever,” Olson said.
The replacement cost needs to be sufficient to restore the value lost in a fire, or other catastrophe, and also to pay for demolition and debris removal.
Insurance premiums can be reduced if improvements make an older home safer, as happened to Graham Simms of North Vancouver’s Lynn Valley.
As part of a major $140,000 renovation on his 1958-era home, he replaced old wiring and the original fuse box with modern breakers. Although the replacement value of the home is up from $165,000 to $225,000, Vancouver-based Canadian Direct Insurance reduced his annual premium from $522 to $330.
“We have changed the majority of the house and they view it as newer,” Simms said. “So I am very pleased.”
Typically premiums rise with the value of the home. Homeowners should also bear in mind that it takes longer to get work done in today’s overactive market which pushes up carrying costs and time in temporary accommodation, said Larry Dybvig of Vancouver real estate appraisers Grover Elliott & Co.
He recommends additional “bylaw coverage” for owners of older homes in case current municipal building codes require the replacement home to be built to a higher standard than applied to the original building.
A study by Dybvig’s firm earlier this year found that residential construction costs have risen by about 50 per cent over the past five years.
The replacement cost is normally far less than the market value of the property, which includes the land, but much more than the market value of the structure.
“A house built in 1928 that the market might value at $25,000 clearly would cost a lot more to replace,” cautioned Jason Grant of the BC Assessment Authority.
Most insurers build inflation protection into their policies so that the property continues to be insured for its value if there is a total or partial loss, said Karen Hopkins-Lee, chief underwriter with Canadian Direct Insurance.
“This year we have applied a five-per-cent inflationary factor but we are actually going through another review to ensure that it is adequate for greater Vancouver,” Hopkins-Lee said.
“There was a tremendous jump after the Kelowna fires when all of this came to light. It is something that undergoes continuous review.”
Easily 25 per cent of the homes destroyed in the 2003 Okanagan fires were under-insured, some by as much as 50 per cent, said Fred Lindsay of Kelowna’s A1 Appraisals.
However, owner-occupiers with guaranteed replacement cost written into their policies received the full replacement cost, Lindsay said, while out-of-town owners who rented out their properties received only the amount stated in their policies.
“If the replacement cost was $200,000 and owners of the rental homes only had the house insured for $120,000, then they got $120,000.”
Since the fires, Lindsay said insurers in the Okanagan have become much more diligent in trying to ensure that everybody has accurate replacement cost coverage.
“Over the past two or three years everybody has seen their insurance premiums going up but if you look at your policy, you will also see that they have increased the amount of insurance on your house significantly.”
© The Vancouver Sun 2006