Replacement cost value insurance

For many Canadians, your home is one of your biggest investments, so your home insurance policy should be built to protect it correctly. That begins with understanding rebuild costs (not market value), choosing the right endorsements, protecting your personal belongings, planning for temporary accommodations and knowing when to contact your broker. With extreme weather conditions increasing insured losses to new heights ($8.5 billion in Canada alone in 2024), now is a good time to review your coverage and ensure it aligns with your home and lifestyle.

Step 1: Confirm your home’s rebuild cost value, not market value

A common gap in home insurance plans comes from confusing market value, replacement cost and actual cash value:

• Market value is what a potential buyer might pay for your home, including the land, if you were to list it for sale.

• Replacement cost is what it could cost to rebuild your home today to a similar quality, using similar materials, using today’s prices.

• Actual cash value factors in the depreciation of your home and personal belongings, meaning a lower payment following a covered loss.

Home insurance is based on replacement cost, not market value. Rebuild costs are typically calculated using:

• Square footage and layout.

• Materials and finishes.

• Local labour costs.

• Debris removal and site cleanup.

So, why does this matter? If your homeowners’ insurance coverage doesn’t reflect current rebuild costs, you could be left paying the difference out of pocket following a covered loss. Statistics Canada’s Building Construction Price Index indicates that construction costs in Q4 of 2024 increased by 0.8% from Q3, with the industry facing pressure due to labour shortages, labour rate increases and building code changes. What to ask your insurance company:

• Does your policy include an inflation guard? This inclusion ensures your coverage adjusts to the rate of inflation as costs increase.

Step 2: Add coverages that fit your risks

Many of today’s biggest claims come from risks that aren’t automatically included in standard homeowners policies. In fact, water damage accounts for nearly 50% of all home insurance claims in some provinces, which is why additional endorsements can make a world of difference:

• Sewer backup: Important if you have a finished basement or area with older sewer systems.

• Overland flood: Essential for homes near rivers, lakes or in low-lying flood plains.

• Groundwater: Needed for areas of Canada with a naturally high water table.

• Earthquake: Higher risk for Western British Columbia, Quebec and other coastal parts of Canada.

• Wildfires: Important for those living near large wooded areas, as 2023 saw a record 17.2 million hectares burned across Canada.

Step 3: Protection for high-value items

Most policies have sub-limits for high-value items like art, collectables, jewellery and more. This means coverage can be capped unless the items are scheduled. Scheduling items involves:

• Getting the item appraised.

• Listing the item separately on your coverage.

• Opting for higher coverage limits.

Step 4: Plan for life elsewhere (additional living expenses)

If a covered loss makes your home unlivable, additional living expenses coverage can help pay for:

• Alternative accommodations.

• Meals and laundry.

• Extra transportation costs.

• Pet boarding.

Remember, a kitchen fire could force you out of your home for weeks or even months. With this coverage, you’ll be able to maintain a normal standard of living while repairs are conducted on your home.

Step 5: Tell your broker about renovations and upgrades

Renovations can increase your home’s rebuild (replacement costs) and your replacement cost coverage doesn’t automatically adjust. Make sure to inform your broker about:

• Bathroom and kitchen renovations.

• Finished basements.

• Additions or outbuildings.

• New roofs, windows or upgrades to electrical or plumbing.

What’s the difference between replacement cost coverage and market value coverage?

Replacement cost coverage rebuilds your home following property damage based on its current value, using similar materials. Market value reflects what someone would pay for your home and land.

Do renovations automatically increase my coverage?

No. Tell your insurer or broker so that your replacement cost policy and rebuild estimates remain accurate.

Sewer backup vs. overland flood: What’s the difference?

Sewer backup comes from within your home through your drains, while overland flood is surface water damage from outside your home.

Contact BrokerLink today

Scheduling a quick chat with a BrokerLink advisor can help you confirm your home’s replacement cost, review endorsements and ensure you’re not left underinsured. Speak with a Broker today about our insurance products and customized protection solutions.

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