Is Your Home Insured for Enough Replacement Value?

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Are you confident that your home is appropriately insured? The impact of inflation on the economy over the past few years has been dramatic, and for some people it has the potential to create an insurance gap with respect to the dwelling coverage in their homeowners policy. For this reason, it’s important to review your current policy to determine whether your dwelling limit is sufficient.

Dwelling coverage is part of your homeowners insurance. It helps to cover the costs associated with repairing or rebuilding your home after it has been damaged or destroyed by a covered hazard, subject to policy terms and conditions and up to any applicable policy limits.

There are different types of dwelling coverage that are available, and the type and amount of coverage can differ from one policy to the next. For instance, many homeowners have the option of choosing between an “actual cash value” policy or a “replacement cost” policy.  Actual cash value is typically based on the estimate of fair market value of your home, factoring in depreciation, and is subject to policy limits. Replacement cost is based on the estimated cost to repair or replace your home and is also subject to applicable policy limits, but it does not factor in depreciation.  Both actual cash value and replacement cost policies can carry the risk that the applicable policy limits might not actually be enough to fully repair or replace your home after a loss, potentially resulting in a coverage gap. As one non-exclusive example, this can sometimes be the case during periods of high inflation when increases to the cost of materials and labor surpass dwelling coverage limits.  If you have an actual cash value or a replacement cost policy, it is important that you regularly check your coverage limits and increase as necessary. 

As an example, let’s say you have a homeowners policy that includes dwelling coverage based on a replacement cost calculation, with dwelling limits of $2 million. Maybe that limit was sufficient when you first bought the policy, but is it enough to actually rebuild your home in today’s market? If your home were to be destroyed in a total loss, and if the actual cost to rebuild was $3 million, then the policy limits would be insufficient and you would have a $1 million coverage gap that you would be responsible for paying.  

That is why you ought to consider “guaranteed replacement cost.”  In the event your home is damaged or destroyed by a covered hazard, a policy that includes guaranteed replacement cost will pay to repair or replace your home to the same or substantially similar specifications regardless of how much it costs.  In the example above, if the home was destroyed due to a covered loss, and subject to applicable policy terms and conditions, then a policy with guaranteed replacement cost would pay the $3 million to fully rebuild the home.  While guaranteed replacement cost policies typically have higher premiums, you may find the additional cost to be a wise investment considering the increased protection.

In short, it is essential to do your due diligence and ensure that you are adequately covered. The difference in premium price between being underinsured and having adequate coverage may potentially only be a few hundred dollars for smaller homes or a few thousand for much larger homes. At the time of a catastrophic loss is the worst time to discover that a frugal choice or your own lack of understanding of your coverage is costing you hundreds of thousands to even millions of dollars due to a coverage gap. 

Don’t fall into the trap of purchasing a policy based on price alone – let us help you find appropriate coverage to protect your home and your family.

Here at Daigle & Travers, we strive to offer you quality coverage at competitive rates. To learn more or to speak with one of our agents, please feel free to call us at 203-655-6974. We have offices located in Darien and Westport Connecticut.