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Print Version What is the appropriate amount of coverage for your home? To begin with, it should be insured for 100 percent of its replacement cost when covered under a standard homeowners policy. Replacement cost refers to the amount necessary to repair or replace damaged building parts with items of like kind and quality. With replacement cost option, the policy pays the full cost of replacing your home, without any depreciation, up to the limit of liability. (This gives you added protection if there is a sudden jump in construction costs due to a major shortage of certain building materials. Construction costs often surge following large catastrophes, such as hurricanes.) Guaranteed Replacement Cost, or Extended Dwelling Replacement coverage, will replace the home regardless of the limit of liability, and typically will have no cap. A home policy with Extended Dwelling Replacement will also replace above the limit of liability, but with a maximum cap of 25% of 50% over the limit. It is important to make no assumptions when it comes to your policy, so ask your agent to verify that you have the right one for you. Many homes are either underinsured or overinsured. For example, some homes insured for long periods of time with one insurance company may have inadequate limits of insurance due to increased building costs. In many cases, homes have been remodeled and improved, and this information has not been conveyed to the insurance agent or company, resulting in severe underinsured home values. If your home is underinsured, you not only have inadequate protection for total losses, but you may also lack full protection for smaller losses. Sometimes homes are mistakenly insured for their market value. However, market value is normally not indicative of the homes replacement cost. For example, market value also reflects the cost of the foundation and the nondestructible land value, both of which normally survive intact if the house burns to the ground and has to be rebuilt. In addition, some homes may be insured improperly to
meet mortgage company requirements. Some mortgage companies require
the amount of insurance be at least equal to the mortgage balance on
the house. The mortgage balance is also not reflective of the homes
replacement cost, which is often considerably more but can also be
less. Insurance companies and agents often struggle in properly
educating mortgage companies about these distinctions, but there is
nothing to prevent you from insuring to actual replacement cost if
that is indeed greater than the mortgage balance. The problem occurs
when the mortgage balance is greater than the replacement cost,
which will result in the purchase of a higher limit than
needed. -Square footage of the home, including its
configuration The more advanced replacement cost estimating programs require detailed information to improve the valuation estimate. For example, a rectangular-shaped home with 1,800 square feet will have a much lower replacement cost than a similar-sized home with an L shape. In other words, the better cost estimating programs require information about the number of corners in the home. The more detailed information your agent asks about your home, the more confidence you can place in his or her recommended limit of insurance. As a final note, you should request an annual review of your homeowners policy to keep up with increasing building supply and labor costs. Also ask your agent about the advisability of adding an inflation guard endorsement to your policy or about the availability of guaranteed replacement cost coverage to help assure that your home is properly protected. Homeowners insurance not only protects your property, but also provides important liability protection. If you have any questions on this important coverage, your agent at Potter-Holden & Company is here to answer questions, help determine your coverage amounts, and consult with you on your policy. Information used with permission from International Risk Management Institute, Inc., Copyright 2008. |
