Over the past few weeks, I’ve written about home insurance covering traditional homes, condos, and town homes, as well as, renters insurance. In all the posts, I’ve mentioned the term replacement cost. On a renters policy, this refers to contents or personal property, while on a home, condo, or town home policy this refers to the actual structure and the contents. Let’s examine what replacement coverage is and how it’s different from the other type of coverage.
Replacement Cost Coverage: The purpose of replacement cost coverage is to replace your home, whatever type it is, and your contents on an as is basis. That means if you have a 2,000 square foot home with a standard kitchen and bathrooms, then it will be replaced with the same kind of home if it suffers a total loss. There should be enough coverage to replace your home given the current cost of rebuilding.
Replacement cost coverage also applies to a partial loss. One of the best examples I see on a regular basis is a roof that has been damaged by hail. In such a case, replacement coverage means your roof would be replaced with the same kind of roof it had before damaged by hail. If you wish to upgrade from a standard three tab or architectural grade of shingle to a hail resistant shingle, the insurance company is responsible to pay what it cost to replace what you currently have, and you’d be responsible for paying the difference.
The only limit on a replacement cost insurance policy is the amount, or limit, of coverage. For instance, if you have $250,000 in coverage on your home, then that is the maximum amount the policy would pay if there were a total loss. The same applies to the amount of coverage on contents. If you’ve replaced all your old furniture with new furniture, it may be a good idea to increase the amount of coverage on your personal property. This is one reason why it’s so important to review your policy annually.
Actual Cash Value: The other type of coverage is actual cash value coverage. This type of home insurance policy pays claims on a depreciated basis. If we take the example of a roof which is damaged by hail, then the claim is paid on a depreciated basis. This is calculated by determining the cost of the roof new and its normal life span in Texas. That helps set the depreciation schedule which is applied to the age of the roof. For instance, a traditional three tab shingle roof has a 25 year life span that is 10 years old, will have 10 years of value deducted from the total cost and the claim would be paid on its current depreciated value.
No one is happy with the claim payment on an actual cash value policy, which is why I believe it’s important to write home and renters policies on a replacement cost basis. What do you think? Share your comments, questions, and experiences with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you!