Replacement Costs on the Dwelling
The “dwelling replacement cost” coverage in your homeowner’s insurance policy covers the reconstruction of your home if it is ever destroyed. A great agent will calculate the dwelling replacement cost amount to accurately reflect the actual cost of rebuilding your home, so that if any disaster did occur, your insurance policy would cover the full cost of rebuilding. However, if your agent does this calculation incorrectly, perhaps by using the market value of your home for the replacement cost, it could cost you thousands of dollars if you ever need to file a total loss claim.
Here is a scenario to illustrate the consequences of a too-low replacement cost amount: Colorado experiences an unusually dry winter and the following summer wildfires ravage many towns, including yours. You and your family fortunately escape the flames, but your house is burnt to the ground. Unfortunately, you chose to buy insurance through a cute TV ad, and the big corporate insurance underwriter cut corners on your policy in order to present you with a cheap rate that left you unknowingly underinsured. While your home is worth $300,000, it really costs $375,000 to completely rebuild. Since the big corporate underwriter suggested a replacement cost that matched the value of your home, you thought “that looks good,” and never thought about it again. That is, until you had to submit a claim for your destroyed home. The claims adjustor tells you “You have $300,000 to rebuild your home,” but all estimates you get from contractors are $374,000. You chose to underinsure your home, and now are stuck coming up with the remaining $74,000 to rebuild your home, even though you have been paying (insufficient) home insurance for decades.
The moral of the story is simple: Replacement cost for your home is different from the market value of your home, and you need a reliable agent to make sure you are protected in case the worst possible scenario ever happens to your home. As an independent agency, we take the time to discuss with you the unique features in your home, to ensure that you have an insurance package that meets your needs. We sometimes hear stories from other companies like the one above, and can’t help but conclude: the worst possible situation can get a lot worse if you are underinsured.
Talk with your agent; discuss the options and costs to determine how much risk you really want to take. They will explain everything in detail so you can make an educated decision on what kind level of coverage to put on your home to minimize your risks at claim time.
When insuring the value of the contents in your home, you have two options: you can either pay to insure their used value (the “actual cash value”) or you can pay to insure their cost to replace new (the “replacement cost”).
We advise everyone to make sure that they have replacement cost coverage for their personal possessions; both homeowners and renters will want to have this option. It might cost you 10% more a year to have replacement cost coverage, but it is really worth it when claim time comes—you could receive up to 40% more for your lost items.
Let’s pretend that you left a candle burning in your living room and your couch, pillows, carpet and curtains caught on fire, and your TV and stereo system were destroyed and all need to be replaced, which will cost about $20,000. If you opted for the cheaper actual cash value coverage, you will only receive the depreciated value of your possessions, or how much your possessions were actually worth in their used condition the day before the fire—anywhere between $10,000 and $16,000 (minus your $500 deductible) for your entire living room that would cost $20,000 to replace new.
But if you wisely opted for the full replacement cost coverage, you will receive the amount it actually cost you to replace everything, or about $19,500 (when you factor in your $500 deductible). To receive the full replacement value for your belongings, it is required you actually replace your possessions. To ensure this, your claims adjustor will issue you a check upfront for the actual cash value less the deductible. After you buy a new couch, TV, stereo, and curtains, you send your claims adjustor your receipts, and get reimbursed for the full amount it cost you to replace everything you lost, and the only out of pocket expense you incur is your deductible.
In the end, it is really worth it to pay a slightly higher insurance rate for the peace of mind to know that if you ever do experience a major loss, you will be fully covered, and will be spared the steep out-of-pocket expenses that add major stress to an already stressful situation.