A question I get alot is "How did you get that number? I'm paying less for the house!" or from a current client " My homes value has dropped a $100,000 since last year. Why did the carrier raise the coverage?!"
Insurance carriers get numbers from national sources that calculate rebuild costs for all parts of the country. The carrier then looks at the zip code, square footage, age and other factors and applies their own formula's to the replacement cost and arrives at what your dwelling coverage should be.
Cost to rebuild home based on Sq.ft, age and zip code: $180,000
Example of a carriers formula:
Rebuild Cost: $180,000
Home is 2 stories, add 20% = $36,000
Total insured value = $216,000
This is only a simple illustration, but a homes condition, risks near the home and the contents of the home can add to the coverage.
In addition, the carrier must also account for debris removal, after all we can't just leave the burned out rubble of your home laying around and then build over it. It's got to go. Then your local city and county governments must have their permit and inspection fees, utility company fees, new plans must be drawn up and approved by local authorities. Now, finally, we get to turn the contractor and their team loose nail up the first piece of your house.
Check out the building cost estimator at http://www.building-cost.net/ and click on start calculator. It is free and will give you a good idea about what your insurance carrier has to plan for. They do leave out debris removal which can vary based on governmental costs.
If your property is determined to be in a high fire area, there is more risk than normal and the carrier will charge you more to make up for the fact that there is a higher than normal chance of you having a claim. Many carriers use a scale from 1 ( no fire danger at all) to 10 ( this place could go up in flames any second!) to rate fire risk. This number is called your fire protection class. It looks at how close you are to a fuel source (i.e. brush or hills), the distance to the fire hydrant and how far you are from a fire department and then assigns a number from 1 to 10.
Remember that insurance is about risk and the potential for risk. You are paying a relatively small amount of money, your yearly premium and your deductible, to get hundreds of thousands of dollars in coverage which would otherwise take you years to put aside in a savings account. I have discussed ways you can save money on insurance elseware in this blog, so I won't go into them here. Don't be afraid to talk to your agent about saving money where you can, but don't sacrafice coverage either. Everyone want's to talk about price when you are buying insurance, then when there is a claim, they want to talk about coverage.