From first-time-home-buyers to seasoned investors, there is a common misconception that the amount a building is purchased for is the same amount that building should be insured for.  Though instinctively this may seem the proper course of action, I will explain how under insuring a home, dwelling, or apartment can have grave consequences.

For a HO-3 Special Form Homeowners policy the general definition of replacement cost is, “Replacement cost contents insurance pays the dollar amount needed to replace damaged personal property with items of like kind and quality, without deducting for depreciation. Replacement cost dwelling insurance pays the policyholder the cost of replacing the damaged property without deduction for depreciation, but limited by the maximum dollar amount indicated on the declarations page of the policy….”

This means means property not insured within the proper percentage (Co-insurance %) of the “Replacement Value” of their property then the loss incurred will be reimbursed on a Actual Cash Value basis.  Actual Cash Value takes into account depreciation of the structure and its contents.  

Now when referring to the “proper percentage” of replacement value, I was talking about co-insurance.  Each insurance carrier has a co-insurance clause on their policies.  Co-insurance is a percentage of the replacement value at which the carrier will still pay replacement cost instead of actual cash value.  Take this example, the replacement value of a home is $200,000 and the co-insurance is 80%.  The home must be insured at $160,000 or greater to receive replacement cost.  If the home is insured for less than $160,000 the carrier pays actual cash value.  The majority of all insurance carriers have a 100% co-insurance clause, however some still maintain 80% and a few others will go as low as 50%. 

Since total losses are relatively rare, it must be mentioned that all partial losses (i.e. kitchen fire, tree through the roof, water-backup from the sewer) on an under insured home are also paid on an actual cash value basis.  That means you might see pennies on the dollar for those 50-year-old oak cabinets your now going to replace with something from Ikea.

Now that you are educated on the concept of replacement cost I recommend you contact the insurance professional you do business with to ensure that agent is insuring your home 100% replacement value.  This way there are no concerns over a particular carriers co-insurance clause.

“If you’d like to talk about your Insurance Risk, contact me today. We can talk about your exposure, and begin our relationship!”

Thank you,

Ryan H.

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