The Rebuilding Cost Question Brokers Can’t Afford to Ignore

What happens when insured values and rebuilding realities drift apart? Brokers say the conversation is far from over.

A home insured for $1.2 million was damaged in a fire; the rebuild cost turned out to be closer to $1.9 million.

Fortunately, the policy included guaranteed replacement cost coverage. Had it not, the homeowner could have faced a significant shortfall.

For brokers, the example highlights a question continuing to linger long after construction inflation sent rebuild costs soaring: Are properties still being insured to value?

“Underinsurance is a regular, everyday occurrence we are dealing with across the industry,” says Carrie Bernardo, vice president of private client practice at Boardwalk Insurance, a division of Oracle RMS.

The challenge is particularly pronounced in the high-net-worth market, where custom finishes, imported materials, and unique construction features can quickly drive up rebuilding costs.

In some cases, insurers are finding significant differences between broker-submitted values and their own assessments.

“We’ll send something in and say it was insured for $2.5 million. And they’ll come back and say, based on their calculation, it’s $3.2 million,” Bernardo says.

For homes valued above $2 million, many insurers now conduct their own inspections and rely on proprietary valuation tools rather than standard broker-facing replacement cost calculators.

Bernardo believes some calculators still struggle to reflect today’s rebuilding realities.

“A lot of the times they’re saying it’s $500 a square foot to rebuild,” she says. “We know in the Toronto area that a lot of these houses can be $1,000 a square foot to rebuild.”

But rebuilding costs are only part of the challenge.

“The valuation of your property doesn’t necessarily correlate to the replacement cost of your property,” says Neal Jardine, president and chief operating officer at BOXX Insurance in Canada. “You could be insuring it for the value that you could sell it, but not necessarily the value for which you could replace it.”

That disconnect can leave clients exposed, particularly when market values, construction costs, and insurance limits move in different directions.

At the same time, affordability pressures are creating additional challenges.

“Premium pressure always creates a dangerous situation in which individuals try to think about how to get a lower rate or lower cost,” Jardine says.

That pressure can lead clients to push back on valuation increases or seek lower limits, even when rebuilding costs suggest the opposite approach.

“The strongest brokers are those who are proactively communicating to clients about the concern of underinsurance,” Jardine says.

For Bernardo, the issue is not whether underinsurance exists. The more important question is what brokers are doing to address it.

Replacement cost discussions cannot be treated as a one-time exercise. Renovations, additions, upgraded finishes, and changing labour and material costs can all change reconstruction costs. Consequently, regular valuation reviews and documentation have become increasingly important.

From an E&O perspective, Bernardo says documenting those conversations is critical. “If it’s not documented, it never happened.”

Although the industry has better tools and more data than it did several years ago, brokers say insurance-to-value remains an ongoing challenge. And when insured values and rebuilding realities drift apart, the consequences are often discovered only after a loss occurs.

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Originally published on  Canadian Underwriter