Homeowners insurance is one of the broadest types of the risk coverage you can purchase. Most people do not have a clear understanding of what is covered by their policy or how to purchase insurance. Some even question whether or not they need homeowners insurance. Even though homeowners insurance is not required in every state (Wyoming), it is required by mortgage companies as protection for their investment. However, even when it is not REQUIRED it is ADVISABLE.
Homeowners protect more than your house. It protects your belongings, your family, your pets, and provides liability coverage if someone is injured at your home or by a pet. Approximately 900 companies in the US write property/casualty policies. 80% of policies in the US are standard policies and cover property and liability. At a minimum, these policies typically cover fire or lightning; wind or hail; explosions; smoke; vandalism; theft; falling objects; the weight of ice, snow, or sleet; freezing of pipes; HVAC malfunctions; burst pipes; and the damage created by malfunctioning appliances.
ACTUAL CASH VALUE
- This policy covers the replacement of your personal property and the repair of your structure with less depreciation. Depreciation may be a %, based on age or the condition of a structure or content at the time of the loss.
As an example, assume you own a TV that is 5 years old and that it is damaged by a burst pipe in the ceiling. An ACV policy may depreciate your TV by 40%. So, if your TV cost you $1000 when it was new, you will only be paid $600 to replace it. You lose 40% of the value or $400.
Now multiply that the expense of carpet, appliances, painting, roofing materials, etc. All of these items CAN be depreciated if you have an ACV policy. This leaves you basically sharing the expense of replacement with your insurance company. An ACV policy may be the most economical and the best option for someone with a new home and new belongings. However, if your home is 5, 10, or 20+ years old you could see the insurance cover drastically reduced while you’re out of pocket expense drastically increases.
FULL REPLACEMENT COVERAGE
- This covers the cost of replacing or repairing your property without a deduction for depreciation and adjusting for current rates. This policy will cost more in the way of premiums, but can really pay for itself if you have a loss.
Let’s use the same example of the same TV. Replacement cost coverage or full coverage will pay for a comparable TV at current rates. So, if your TV was $1000 originally and it cost $900 to replace, that’s what you are paid. If it cost $1200 to replace though, that is what you are paid.
This type of policy WILL typically show a form of depreciation. Recoverable depreciation. Let’s say all of the floorings in your house is damaged and needs to be replaced. The insurance company may estimate that replacement with the same like, kind, and quality will be $8000.
Typically, they will NOT send you a check for $8000. They may send you a check for $6000 with a breakdown showing $2000 recoverable depreciation. This means once your job is done, they will send you the additional $2000 or if your job cost totaled $2500, as long as you replaced the same like, kind, and quality, they will send you $2500.
EXTENDED REPLACEMENT COST
- This covers up to a certain percentage over the policy limit. This covers a sudden increase in construction cost or for specialty items you added after the purchase or construction of your home. This policy is for homeowners that do not have a regular policy review even though they are adding additions, upgrading fixtures, etc.
- Replacement cost should not be confused with market value. Also, your policy will list “Special Limits” for coins, watercraft, jewelry, furs, firearms, silver, art, etc. Additional coverage for these things can be purchased and should be purchased if you collect fine art, guns, jewelry, antiques or if you have an extensive collection of other premium items.
- Don’t forget, if you run a business from your home, you have limited business coverage. Additional insurance should be purchased to cover business owned equipment, supplies, and any loss of income while you rebuild.