This post is an overview of common questions we receive from property owners who have concerns about homeowners’ insurance. Despite the necessity of this form of coverage to protect people from catastrophic financial losses caused by natural disasters, fires, burglary and other covered hazards, some people underestimate the importance or scope of their homeowners’ coverage. In other cases, people are confused about how to successfully make a claim against their policy. This blog post is intended to arm policyholders with the information they need to get the most out of their coverage.
How is replacement value distinguished from market value and actual cash value?
If you purchase replacement cost coverage for your home, the insurer will typically require you to carry a certain minimum amount of coverage to avoid financial responsibility for a partial loss. Insurers often require policyholders to purchase coverage that equals a percentage of the replacement cost of the home, such as 80 percent of the replacement value. Homeowners might want to consider more extensive coverage because replacement coverage can deviate substantially from fair market value. The fair market value refers to the amount your home is worth if you sell it on the open market.
Homeowners also need to be aware that replacement cost can be complicated to calculate. Factors to consider include HVAC features and enhancements, local material/labor costs, removal of debris, square footage, construction type, structural engineering fees and more. The cost of rebuilding a home that has been substantially damaged is more costly than the cost of new home construction. The cost of rebuilding includes extra expenses like clearing debris and a loss of the economies of scale involved in building a larger project with multiple homes.
When debating whether to obtain replacement coverage or actual cash value, policyholders need to understand the difference between these types of coverage. Replacement policies are based on the cost to replace your home and the personal property within the residence based on current costs and new materials. By contrast, actual cash value (ACV) corresponds with the value of your home. The short-hand method for determining this amount is the replacement cost less depreciation value.
When should my coverage be reviewed to determine whether my coverage needs modification?
Generally, you should review your policy anytime it comes up for renewal because regular changes in your situation, market conditions, building costs and liability exposure might justify adjusting policy limits, covered hazards and/or other terms or conditions. Some specific situations that justify re-evaluation of your homeowners’ coverage include the following:
- An individual moves in or out of your home.
- A high-end luxury item is purchased.
- The home is significantly remodeled or renovated.
- You experience changes in your liability exposure, such as risk associated with installation of a swimming pool.
Do I need to purchase a homeowners’ policy during the building process if I am having a home built?
The best practice is to obtain coverage during the construction process because fire, vandalism or a storm could cause significant damage. If you delay purchasing coverage until construction of the home is completed, you are risking a serious financial loss. The home could be even more vulnerable to the elements during the construction process.
What types of losses will not be covered by my homeowners’ insurance policy?
While the precise perils covered by your policy will depend on the type of coverage, some types of perils that often are not covered include war, intentional damage, floods, ordinary wear and tear, nuclear accidents and earthquakes. This list of exceptions is illustrative rather than exhaustive. Coverage for many perils or forms of loss that are not covered under a standard homeowners’ policy can be purchased for an additional premium.
If you are interested in learning more about Florida insurance coverage and claims, we invite you to continue reading Part III of this blog. When your insurance company treats you unfairly or fails to process and pay your claim in a timely manner, you might have a legal claim for financial compensation. My law firm represents policyholders in claims disputes in Miami and throughout Florida. The Law Firm of J.P. Gonzalez-Sirgo, P.A. offers free consultations and case evaluations. No Recovery, No Lawyer Fees. Call 305-461-1095or Toll Free 1-866-71-CLAIM.