When it comes to your home insurance, most people don’t want to think about “how” the insurance company is going to pay them in the even of a loss. This, however, is an important component of the benefits your insurance provides in the event of loss.
Your declarations page will specify the valuation clause the insurance company will use. It’s important to understand what these mean so that you aren’t surprised when a claim is made.
Actual Cash Value
Actual cash value means the insurance company will pay Replacement Cost - Depreciation.
Let’s assume you have a dining room table that you paid $3000 for when you bought it.
To replace it with a comparable model will cost $5000 and it has depreciated by 20%.
This means, exclusive of any deductibles, the insurance company will pay $5000 (the current replacement cost - depreciation or $5000 - $1000 (20% depreciation) = $4000 less any applicable deductibles.
Replacement Cost Requirements
If your policy specifies one of the various replacement cost options, it’s important to realize that coinsurance requirements must be met. In the event the insured does not carry property limits sufficient to meet the coinsurance requirement, there will be an adjustment for a partial loss.
It’s important to note that property is not insured for its market value, but rather the cost to replace it.
For example, a 2000 square foot house insured at $200/sq. foot to rebuild it will be covered for $400,000, regardless of the market value.
As long as coinsurance requirements are met, if your policy specifies replacement cost, the insurance company will pay the cost to replace the property at its current price, less any applicable deductibles.
Extended Replacement Cost
If your policy contains an Extended Replacement Cost valuation, the insurance company will pay to replace the damaged property, even if it exceeds the limits of your coverage, subject to a certain amount above the policies stated limits. Again, the coinsurance requirement applies.
Extended Replacement Costs helps with certain market fluctuations due to changes in the cost of building material or labor.
Guaranteed Replacement Cost
This means the insurer will pay the total required to rebuild a property, regardless of the cost.
Please bear in mind the insurance company will use usual, customary, and reasonable in determining your claims payment.
This means they will pay for reasonable repairs at a rate consistent with the average rate charged by other contractors in a given geographic region.
Understanding your property policy's valuation clause will help to ensure your expectations are met when you file a claim.