Home Insurance Articles
Understanding Replacement Cost Coverage And Your Home Insurance
2010-08-19
When experiencing a loss of your home or personal property, you want to make a claim on your insurance that won't result in a terrible shock of disappointment. Unfortunately, if you don't pay close attention to your coverage, you might find that you've been paying home insurance premiums for years without adequate coverage for your lost house or personal items. If your policy was written to make up your losses at actual cash value instead of providing replacement cost coverage, you could find yourself having to cover enormous costs out of your own pocket.
What actual cash value means is whatever you're insuring will be replaced at its cost minus an allowance for depreciation. So if, hypothetically, you're house burned down in a wildfire, the complete costs for rebuilding will not be paid for by your insurance. Replacement cost is the cost to replace the damaged property with no depreciation (note: replacement cost is not the "market value" of the house, or what the tax-assessor says it's worth). The difference between the two has fairly substantial consequences at the time of making a claim.
Replacement cost needs to be figured out at the time the policy is written. A subset of replacement cost coverage is functional replacement cost, which covers rebuilding using contemporary materials and techniques to the standard that existed before the loss. Figuring the value of the functional replacement cost needs to take into account such variables as demands for scarce materials in the case of a general disaster, or rises in labor costs over time.
Not just the structure, but also your personal possessions can be insured with replacement cost coverage. There are some classes of possessions, notably jewelry and firearms, which are not generally covered under a homeowner's policy, and thus need separate coverage. For jewelry, replacement cost coverage would be the better alternative, and for firearms, if you're a collector and have very valuable specimens in your possession, replacement cost coverage is likewise the better choice. Each valuable needs to be appraised and deliberated over before you buy the policy-it's too late once the disaster has happened.
Replacement cost coverage policies typically require that you insure your property at least 80 percent of its replacement value-then, if the property is totally destroyed, the insurance companies will replace it completely. If this percentage is not maintained, payment for partial losses may be reduced. Of course, replacement cost coverage will increase your home insurance premiums, and any amendment to your basic policy to cover items specifically will also raise your home insurance premiums. As always with deciding how much coverage to buy, it's a tradeoff between what you can afford to pay versus what you can afford to lose.