October 19, 2017
For those of you who own your home, it’s likely your largest investment/asset.
That’s why I am so concerned that many of you may not be sufficiently protecting your home. According to data CoreLogic provided cnbc.com, about one in four homeowners has an insurance policy that would cover less than 80% of the value of rebuilding the home.
Being underinsured at all is crazy enough. But what you need to understand is that once your policy drops below 80% of the rebuild value, your insurer might limit any claims you make, even if it is not for a total rebuild. There is a clause in many insurance policies that says if the “insurance to value” ratio of your coverage is less than 80%, any claim you make may result in a reduced payout. For example, if your insurance covers just 75% of the cost to rebuild your home, and you make a claim for say $20,000 you might be eligible for just a $15,000 settlement (70% of the $20,000.)
Please pull out your policy pronto and give it a thorough review.
Here’s what to zero in on:
What’s the Current Cost to Rebuild? It’s important to understand that the market value of your home is not the issue here. Insurers focus on the cost to repair/rebuild. The best way to get a solid estimate is to ask a local builder for the cost per square foot to build in your neighborhood. And be very clear what level of finishes and amenities you have. Carpeting or hardwoods? In-floor heating? You want an estimate of what it costs to rebuild the house you currently live in, with the fixtures and finishes you have. Making sure your policy’s value is in line with your rebuild cost is crucial.
Do You Have Extended Replacement Cost Coverage? In the event you have a major loss, extended coverage will pay you more than the stated limit on your policy for a covered loss. With extended replacement cost your insurer will pay up to 125% (and sometimes more) of the policy value. If you currently have basic replacement cost coverage, time to upgrade. And if you have actual cash value (ACV) you are making a huge mistake. With ACV your insurer is only obligated to reimburse you for the depreciated value of any covered loss. Example: if the 10-year old roof needs to be replaced after a storm, you’ll get paid the cost for a 10-year old roof, not a new one.
Do You Have Building Code Upgrade Coverage? If you own an older home, any rebuilding could likely include needing to do work that is in line with current building code regulations. If your policy doesn’t explicitly include this coverage, your insurer is not obligated to include this extra cost in a settlement. If your policy doesn’t offer it as part of the general coverage, ask your agent about adding “ordinance or law coverage.”
What Will My Policy Cover if My Home is Flooded? Flood coverage is not a standard part of homeowner’s insurance. You must buy additional coverage. Even if you are not legally required to buy flood insurance—only homes in the highest risk flood zones must purchase the insurance before obtaining a mortgage—I highly recommend you look into it if you live in a low-lying area, or one that is prone to severe storms. Flood insurance is mostly sold through the Federal Emergency Management Administration.
What Will My Policy Cover for Wind/Hurricane Damage? Most policies provide coverage for high winds, though 19 states charge separate “hurricane” deductibles. Make sure you understand how your deductible works; in some states it is a percentage of your policy coverage. A 5% hurricane deductible on a $400,000 policy means you would have to pay the first $20,000 of repair/rebuild costs for damage caused by a hurricane.