By William Rodarmor

If you haven’t reviewed the insurance coverage on your home in a while, you may be in for a shock. Thousands of people in Southern California and Florida found that they could not afford to rebuild after the devastating fires in 2003 and hurricanes in 2004. “The cost to rebuild a house has gone up dramatically in the last five years,” says Rose Seitz, an Allstate Insurance agent in Pleasant Hill who works with clients throughout the East Bay. “I used to figure replacement cost at $200 a square foot, but now I’m consistently using $325.”

How much insurance you need to successfully replace your home after a loss depends on its age, size, condition, and location. But just as home prices have jumped, so have replacement costs. As a result, many longtime homeowners are woefully underinsured, and they don’t even know it.

The fire that roared through the Berkeley-Oakland Hills in 1991 was followed by equally heated battles between insurance companies and their policyholders. Some people settled quickly, others held out for big settlements, but the effect on everybody was a sharp lowering of the ceiling on future payouts. For the companies, the problem was that their policies usually “guaranteed replacement” of the dwelling, and the cost of rebuilding had soared over the years. Where people replaced 50-year-old cottages with lot-filling McMansions, it cost the carriers even more.

In response, the companies decided to cap their payouts. Today, insurance companies will guarantee replacement up to the policy limit, plus a certain percentage, and no more. This is the amount by which the company will increase its repayment if the policy limit doesn’t cover the loss. The exact number depends on the company. Allstate and AAA will pay 50 percent more; Farmer’s, 25 percent; and State Farm, 20 percent.

Here’s how it works. Suppose you live in an area where replacement cost is $300/square foot and you insure your home for $300,000 with a company that adds 50 percent. If your home burns down, the company will pay up to $300,000 plus 50 percent, for a total of $450,000. If you’re insured with a company that adds only 25 percent, you would get a total of $375,000. (Incidentally, it may be better to lose your home to a fire than an earthquake. That’s because many people who have quake insurance buy it from the California Earthquake Authority, which caps its payout at the face value of the policy. In the first example above, you collected $450,000 when your house burned. If it had collapsed in a quake, the limit would be only $300,000.)

Even with a big check from an insurance company in hand, you may be chagrined at how expensive rebuilding can be. The cost in Berkeley and Oakland runs $300 to $350/square foot, and in places like Piedmont can go as high as $400. But there’s a lot of variation. One of Seitz’s clients in Concord is rebuilding for $187 a square foot, for example, whereas a burned house on Derby Street in Berkeley is budgeted at $325.

Rebuilding cost partly depends on the quality of the original home. “When you rebuild, the insurance company must match the quality of the original,” says Seitz. “For example, if you had marble floors, they can’t say they will only pay for vinyl. They have to put in marble.” The age of the house is also important. The newer the house, the less costly it is to rebuild, and Seitz says 1950 is the cutoff date. “With many houses built since 1950, you get boxy windows versus arched ones, less plaster and detail work, and slab floors,” she says, all of which are cheaper to replace. Naturally, an architect-designed modern house built with intricate, elegant finishes will be more expensive to replace.

At one level, the evaluation process can be very objective, says Ken Buffum, an independent insurance agent in Union City. “Basically, I ask for the square footage of the house and the year it was built,” he says. “After that, it’s out of my hands, because the companies I work with have their own formulas for calculating replacement value.” The variation comes from house size and geography. One of the insurance companies Buffum works with has a chart that Buffum and other agents often consult. Says Buffum: “For Alameda County, the chart rates any house under 1800 square feet at $180 a square foot. From 2600 to 3600 square feet, it’s $210; above 3600 square feet, it's $280.” The chart, he says, is remarkably accurate.

One huge factor in rebuilding is whether an older house must be brought up to modern building code standards, says East Bay architect Lorin Hill. Code upgrades refer to life, safety, and health issues: adequate daylight and ventilation, emergency egress windows from bedrooms, stair slope and width, etc. Another component is structural, involving how well the house would resist an earthquake. Finally, the house’s electrical wiring, ground fault protection, drainage and plumbing might have to be upgraded as well. Again, this can run into money. In a very old house, knob-and-tube wiring must be torn out, and galvanized pipes replaced with copper.

These items can be so expensive that smart homeowners pay for a “code upgrade” rider in their policy – which is vitally important if you own an older home. Probably the most expensive house to rebuild would be an old, well-built redwood home with lots of beautiful finishing touches. “Anything under $300/square foot would probably involve some sacrifices in charm or character," says Hill. “If you have wood paneling and coffered ceilings, replacing them would be expensive.”

Given enough time, even pessimists can be lulled into a false sense of security. The years go by, the house still stands, and the policy falls out of date. So the people most likely to be underinsured are those who haven’t bought or refinanced their home in a while. “When you’re buying a house, the bank is going to make sure you have an insurance policy based on the cost to rebuild,” say Seitz. “Otherwise, they won’t let escrow close.”

The state’s insurance companies are trying to make sure their clients are covered. After the Southern California fires two years ago turned up so many underinsured homeowners, state insurance commissioner John Garamendi told the companies to do something about it. In January, Seitz’s office hired a staffer whose only job is to call policyholders and discuss their policy limits. “Every day we find people with only $140/square foot of coverage because they haven’t updated their policy,” she says. It’s the homeowner’s responsibility to stay current, but many of us don’t get around to it. People should review their coverage every other year, Seitz says. “If you haven’t looked at your policy in five years, I can guarantee that you don’t have enough coverage.”