Understanding the home-insurance coverage that you have can be difficult. My experience is that many agents and brokers don’t do a good job of explaining it, or simply are trying to offer the lowest cost option, skipping out on many coverage's that cost very little and could make the difference when you have a claim.
I’m addressing some common concerns that many clients have, whether they have owned their home for several years or are planning to buy their first one during the peak home-buying season that begins in the spring.
Most home insurance policies offer actual cash value or replacement cost. The actual cash value policy is calculated by subtracting your depreciation from the replacement cost. To illustrate, let’s say that your kitchen sink overflows and ruins the carpet that you bought four years ago for the adjacent dining room. The insurer would calculate the cost of replacing the damaged carpet with a new one, subtract an amount that’s equal to four years of normal wear-and-tear to the old one, and then give you a check for the difference after also subtracting any deductible that you might owe.
Now, let’s say that you had a more comprehensive (but more expensive) replacement cost policy or a similar replacement cost endorsement. The insurer would pay to repair or replace the carpet, without subtracting a depreciation deduction for the four years of previous wear and tear.
There are two even more comprehensive — and again, more expensive — types of policies that are especially worth considering if you want to protect against the total loss of your home due to fire, high winds or a few other types of perils.
Extended replacement cost coverage will pay you a preset amount over and above your current policy limits, usually 20 or 25 percent, if the current limits aren’t high enough to completely repair or reconstruct your home after a covered loss. For example, if the limits on a policy you took out a few years ago would pay a maximum of $200,000 to rebuild your house after a total loss, but it would cost $240,000 to rebuild it today because labor and material costs have soared, the policy would reimburse you for most or all of the unexpected overage.
And then there’s what some experts call the “Rolls-Royce” of homeowners insurance policies. Known as guaranteed replacement cost coverage, it typically pays for the entire reasonable cost of both rebuilding and refurnishing your house, regardless of your policy’s limits.
Yet, even a Rolls-Royce homeowners insurance policy won’t always cover everything. That’s why one of the fastest-growing types of supplemental homeowners coverage involves a building code endorsement that can be added to an owner’s new or existing policy.
Why? Because local building codes are always changing. Even if you purchased a home that was built just five or 10 years ago, there’s a good chance that those codes have since been heightened to include required upgrades to roofing, plumbing, electrical systems or the like if the home must be reconstructed or simply remodeled.
Even if a top-of-the-line guaranteed replacement cost policy doesn’t cover those legally required upgrades, a building code endorsement should.
Remember, too, that you might need additional types of insurance even if you have the fanciest of policies. Although the most basic and inexpensive policies usually will cover damage caused by fire, high winds or even riots, they will not pay for damages caused by many natural hazards that have a long history of striking areas.
We always recommend purchasing flood insurance as well. Even if you don't live in a flood zone it's a highly recommend policy. If you do live in a flood zone your banker will require a flood policy.
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