Cost of Building Insurance

Building insurance protects your real property investment against losses from damage.

Real estate is probably the largest investment you'll ever make, so buying the right insurance to protect it against loss is an important part of protecting your investment. When you try to determine the cost of this insurance program, however, you'll see that there are wide variations in building insurance costs throughout the insurance market, and that premiums are based on a number of different factors.

Reconstruction Cost

The primary driving factor behind building insurance premiums is the amount of reconstruction cost protection you purchase. Building insurance is designed to completely rebuild your home or other building if it is destroyed. Since reconstruction costs change each year, it is important that you review the amount of coverage you have annually with your insurance agent or adviser. For a rough estimate of your building's construction cost, contact a local reputable building contractor or appraiser to learn the average construction cost per square foot in your area. Multiply this number by the total square feet in your building.

Coinsurance

If you do not buy enough reconstruction cost protection to fully rebuild after a total loss, you may face financial consequences when you file a claim, even if you only claim a partial loss. Insurers often apply coinsurance, which means they estimate the amount of insurance you should have and compare it with how much you actually have. If you are only insured for 70 percent of your building's reconstruction amount, they must only pay 70 percent of your loss. This can translate into a much higher financial burden for you than paying the appropriate premiums in the first place.

Replacement Cost Endorsement

Another factor that determines building insurance cost is the type of settlement you choose. Building insurance settles on an actual cash value basis by default, meaning your settlement is depreciated by the building's age and condition at the time of loss. These settlements do not often provide enough money to rebuild. You can buy a replacement cost endorsement for the policy, which eliminates the depreciation, but this will raise the premium. Also, even with this endorsement, if you choose not to rebuild after a loss and settle for cash instead, you will likely only receive an ACV settlement.

Real Property Definition

Each insurer is allowed to define real property differently. For some homeowner's insurance companies, fences and garages might be considered part of your home while others may consider them as separate structures. Commercial insurers may have similar differences for signs, marquees and other exterior fixtures. Internal structures may be considered part of the building or as contents. How your insurer defines real property can affect your policy's cost because you must insure all primary real property together, generally. Separate structures and contents are often included in the base premium, up to a certain limit, or calculated differently than the primary structure.

References

• Huntington T. Block Insurance Agency, Inc: Building Insurance
• Rocky Mountain Insurance Information Association: Homeowners Insurance Policy Basics