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 your coverage be reviewed to determine whether your 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 you need to purchase a policy during the building process if you are 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 your 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.

You can reach Miami Insurance Claims Lawyer J.P. Gonzalez-Sirgo by dialing his direct number at (786) 272-5841, calling the main office at (305) 461-1095, or Toll Free at 1 (866) 71-CLAIM or email Attorney Gonzalez-Sirgo directly at [email protected].

J.P. Gonzalez-Sirgo
J.P. Gonzalez-Sirgo, P.A.
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