Why Your Home Insurance May Not Fully Cover the Cost to Rebuild Your Home

brick fronted house with major fire damage indicating the need to put in a homeowners insurance claim

Many homeowners trust that their home insurance policy will cover the full cost of rebuilding after a disaster. Unfortunately, reality often proves otherwise. Rising material prices, code upgrades, and other hidden challenges can leave significant gaps between insurance payouts and actual rebuilding costs.

According to CRC Group, understanding these risks ahead of time can help homeowners better protect themselves.

Here’s a breakdown of why your home insurance may not fully cover a reconstruction — and what you can do about it.

Rising Material and Labor Costs

Over the last few years, construction costs have climbed sharply. Inflation, labor shortages, and global supply chain disruptions have pushed up the price of everything from lumber and drywall to roofing materials and labor.

If your policy hasn’t kept pace with these increases, your dwelling coverage may not be sufficient. As CRC Group explains, rapid price escalation can quickly leave standard replacement cost policies outdated and inadequate.

What you can do:

  • Regularly update your dwelling coverage amount.

  • Consider adding an inflation guard endorsement to your policy.

Costs of Meeting Current Building Codes

When rebuilding after a loss, homeowners often face new building codes and regulations. Even if your original structure was legally compliant before, it may no longer meet modern standards.

Unfortunately, standard home insurance typically doesn’t cover the extra costs associated with code upgrades unless you have ordinance or law coverage. Code compliance can significantly increase the total cost to rebuild — sometimes by tens of thousands of dollars.

What you can do:

  • Add ordinance or law coverage to your homeowners insurance.

  • Talk to your insurance agent about local building code risks in your area.

Challenges of Partial Losses

In many cases, partial losses (like a kitchen fire or roof collapse) are more complicated than total losses. Rebuilding parts of a structure while trying to match new materials to old ones can be expensive — and insurers may only cover the damaged portion.

CRC Group highlights that home insurance carriers often won’t pay to replace undamaged materials simply for aesthetic reasons. This can lead to mismatches in siding, flooring, and roofing, reducing your home’s value and curb appeal.

What you can do:

  • Look into policies that include matching coverage.

  • Work with your claims adjuster early to address material match issues.

Living Expenses During Reconstruction

Home insurance typically covers Additional Living Expenses (ALE), helping homeowners pay for temporary housing while their home is being repaired. However, coverage has time and dollar limits.

Given today’s construction delays and permitting challenges, many rebuilds take far longer than expected — meaning homeowners could exhaust their ALE benefits before their home is livable again.

What you can do:

  • Review your ALE coverage limits.

  • Consider increasing the limit or purchasing an extended ALE endorsement.

Why Rebuilding Costs More Than New Construction

Reconstruction after a disaster often costs more than building a brand-new home. As CRC Group points out, rebuilding typically involves:

  • Working around damaged structures.

  • Demolishing and clearing debris safely.

  • Meeting stricter inspection and compliance standards.

These complexities drive up costs that many insurance policies don’t fully account for.

What you can do:

  • Make sure your home insurance covers true reconstruction costs — not just standard construction.

Protect Yourself: Steps to Take Now

Protecting your home — and your financial future — starts with proactive planning. Many homeowners only realize they’re underinsured after a major loss. Take these smart steps now to help avoid costly surprises later:

✅ Schedule an Annual Policy Review

Meet with your insurance agent every year to update your coverage based on rising construction costs, renovations, or market changes. A simple review can reveal gaps before they become major problems.

✅ Increase Your Dwelling Limits

Your insurance should cover the full cost to rebuild today, not what you originally paid for your home. Construction costs have risen sharply in many areas. Ask your agent about adjusting your dwelling limits to match current local building expenses.

✅ Add Ordinance or Law Coverage

Older homes often need upgrades to meet today’s codes after a loss. Without ordinance or law coverage, you could be stuck paying for costly code-required improvements yourself — like upgraded electrical systems or structural changes.

✅ Consider Extended or Guaranteed Replacement Cost Coverage

Standard policies often limit how much they’ll pay after a loss. Extended Replacement Cost adds extra coverage (typically 10–25% over your limit), while Guaranteed Replacement Cost ensures your full rebuild is covered, even if prices skyrocket.

✅ Review Your Additional Living Expenses (ALE) Coverage

If rebuilding takes longer than expected, you’ll need ALE coverage to pay for temporary housing, meals, and other essentials. Check that your policy offers enough time and money to cover a lengthy rebuild.

Rebuilding after a loss is stressful enough without financial surprises. Don’t assume your current policy will automatically cover every expense. By understanding where the gaps might be and updating your insurance accordingly, you can ensure a smoother recovery if disaster ever strikes.

Having proper insurance and competitive premiums is important. Let us cover your assets and be prepared for anything. No matter what type of insurance you are looking for, look to Banas & Fickert Insurance Agency for the best in insurance coverage. Call us today at 413-527-2700 for quotes or questions. Trust in us to help keep you safe and protected

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