Disaster strikes. You’ve just had a major loss of your home and your belongings. Once you make sure everyone is ok, the next big question on your mind may be, “How much will my insurance pay on my claim?” You dig up your policy, see the coverage limits on the front page and wonder, “Is this what I’ll actually receive after I pay my deductible?”
The answer is … it depends — and you’ll have to look further than your dec page to find out.
Cash Value vs. Replacement Value
A number of factors determine how much homeowners insurance pays out in the event of a claim. The first important consideration is whether your policy reimburses for actual cash value (ACV) or replacement cost. Actual cash value is the item’s depreciated — or used — value. It reflects its resale value based on its current age and condition. The older it is, typically the less its cash value. For example, the big-screen TV you bought to watch the Super Bowl five years ago for $1500 might only have an actual cash value of $450 today. That’s a big difference that wouldn’t allow you to replace that TV with a comparable new item.
Replacement value, on the other hand, reimburses you to purchase a new TV of the same size with similar features to the one that was lost in the insured event. Replacement value policies obviously hold a significant advantage over ACV policies, but they come at a higher cost. Actual cash value and replacement value are subject to policy coverage limits.
Coverage Beyond Policy Limits
However, there’s another type of reimbursement your policy may specify: extended replacement cost. With this endorsement, your carrier can pay for the cost of a home to be rebuilt even if the loss amount exceeds the dwelling coverage policy limits.
If recent changes in building codes or ordinances preclude you from rebuilding your home to its pre-loss condition — requiring improvements to the structure at an additional cost — even full replacement value on your dwelling may not be enough. In this case, additional ordinance or law coverage would be necessary to reimburse you for that added construction expense.
Your homeowners policy may cover the replacement cost of your physical structure (the amount to rebuild the home), but only the actual cash value of its contents. So, it’s important to read through your policy carefully for these important details and distinctions.
Documentation and Policy Exclusions
You may have to document the loss of a particular item and provide proof of purchase in order to receive reimbursement by your insurer. This is why it’s a good idea to keep copies of receipts (especially for more valuable possessions) in a safety deposit box or stored digitally in the cloud.
Make a detailed and thorough inventory. Describe each item, indicate the time of purchase and take photographs or a video of the contents of your home, room by room. Store that information offsite in a secure location.
Note that your policy may also have limits or exclusions for certain types of items, such as cash, antiques, artwork, jewelry or electronics. However, sometimes you can purchase additional coverage for such things in the form of a rider.
Know Your Limits
Other aspects of your policy may limit your reimbursement following an insured event. Experiencing a major loss is bad enough — you don’t want to go through a second round of panic afterward wondering if you have enough coverage. This is why it’s so important to read through your policy to understand its terms and conditions ahead of time.
A knowledgeable We Insure agent will be happy to review your current homeowners policy — and provide you with a fast and free comparison quote to make sure you’re getting the best coverage at the lowest price. Don’t find out the hard way that you don’t have the insurance protection you need. Call We Insure today.