Home insurance provides coverage for the dwelling (plus attached fixtures and structures), personal property of the occupants, liability and living expense if you need to be relocated during repairs. Some folks assume that if you have homeowners insurance and disaster strikes your house, the insurance will pay to have your home rebuilt and refurnished. You are probably not one of those people because you’re reading this, but since you’re here, lets hash it out.
Was your home built this year?
If you answered yes, congratulations on your new house. If something happens to it in the near future, the price of the materials and labor to rebuild may not change so you just need to prepare for cleanup costs and demand-pull inflation. You can keep reading if you like (because who doesn’t love a good insurance blog) but you may be okay with what you have.
If you’re sitting at your Formica counter with your toes tangled in wall to wall kitchen shag carpeting and you’re trying to remember what year your house was built – we need to talk.
Homeowners Insurance Coverage Options
First let’s define some insurance lingo for different coverage options:
– coverage that will pay for replacement up to the limits stated in your policy
Guaranteed replacement cost
– unlimited coverage to replace as long as you have followed the company’s guidelines
Extended replacement cost
– replacement up to the limits stated in your policy plus an extra predetermined percentage
Actual cash value (ACV)
– the replacement cost minus depreciation
Fictitious Case of Homeowner Debbie D. Duran
Now let’s see how these different policies would change the outcome of a disaster. We will consider the fictitious case of Debbie D. Duran who bought her house in 1980. The house had been constructed twenty years prior so she had it outfitted with the latest and greatest furniture and state of the art appliances to update it. Debbie had a 40” projector TV in the living room. Her waterbed was adorned with the newest Laura Ashley quilt; her dining room had a sleek glass table and every room in the house had a touch lamp. Debbie spared no expense furnishing her home and so she took exceptional care of everything to make sure it all would last. 35 years later all her treasures were fully functioning and intact – even her acid washed dungarees still had crisp pleats. One night in August 2015 Debbie fell asleep while binge watching Miami Vice, leaving a candle still lit. Unfortunately, her cat knocked over the candle starting a fire and the house was quickly engulfed. Debbie and her cat escaped unharmed but her home and its contents were not salvageable.
SCENARIO 1: Debbie decided to save money and have her homeowners insurance cover only the actual cash value (ACV) – after all, it had been 35 years and she had never had a problem. Because ACV covers the value of items after depreciation, her policy did not provide enough money to fully replace her house, appliances and furniture. For example, the value of her destroyed tv would be based on the market value of a used 35-year-old projection tv, not based on what it would cost to purchase a brand-new flat-screen television.
SCENARIO 2: Debbie chose the standard replacement cost coverage assuming that this would provide enough coverage to replace her house and its contents in the case of unforeseen hazards or perils. Debbie had a $450,000 limit which seemed like it was a sufficient amount to cover her home and possessions. Unfortunately, the reconstruction cost $600,000 – forcing Debbie to borrow $150,000 from her 401K to finish the job.
SCENARIO 3: Debbie added extended replacement cost coverage to her $450,000 replacement cost coverage policy, adding an extra 20% of her policy limits. In this scenario, the extra $90,000 might have been enough to help finish the construction of her home but there was a sudden spike in the cost of construction materials and the crew quickly discovered that the burnt shingles and flooring were made with asbestos, causing the cleanup costs to triple. Once again Debbie had to borrow money from savings to cover the overage.
SCENARIO 4:Debbie added guaranteed replacement cost coverage (including loss of use) to her homeowners insurance policy. Debbie and her cat lived comfortably at a comparable home a few blocks over while her home was reconstructed. She never worried about the spike in construction material costs, the asbestos cleanup costs or finding a 35-year-old projector television for sale because everything was covered and depreciation wasn’t subtracted from the replacement cost of her possessions.
Daigle and Travers is a top writer of New York and Connecticut homeowners’ insurance. Based in beautiful Darien, nestled between Stamford, Norwalk, and New Canaan; we serve Fairfield County, Greenwich, Weston, Westport, Wilton, Ridgefield, Redding, Easton, Fairfield, Southport, Trumbull and parts of Westchester County, Long Island, New Bedford, Rye, Scarsdale, Chappaqua, East Hampton and Sag Harbor.
Here at Daigle & Travers Insurance, we will provide you with coverage to make sure your investments are protected in the event of a disaster. When partnering with us, we will give you the necessary information and options you need to choose an insurance company and policy. Give us a call today at (203)-655-6974.