Insurance Coverage: Know Your Choices Part 2

How Much Insurance Is Enough?
Depending on the type of policy, the different dwelling coverage options could be:
1. Replacement Cost Coverage
2. Actual Cash Value
3. Special Payment - loss is paid before dwelling is repaired, rebuilt or replaced.
4. Functional Replacement Cost or Market Value Coverage - repairs are made using common, modern materials and methods without deduction for depreciation unless repairs are not made, and if a total loss, the payment amount will be the market value of the home.
5. Stated Value - a selected value is established by the insured, and this value is the limit of liability.
Depending on the coverage you select at the time of purchase of your policy, if you should incur a loss, the settlement of that loss will vary. A loss can be settled based on a replacement cost, repair cost, or actual cash value basis. Replacement cost is not the market value of your home, nor is it the tax-assessed value. It is the cost to replace the damaged property, with no reduction for depreciation of the damaged property. Actual cash value is the cost to replace the damaged property reduced by an allowance for depreciation. Functional cost or market value (also known as repair cost) is the cost to repair the damaged property with equivalent construction for similar use. An example of functional replacement would be to replace a plaster wall with drywall. If stated value coverage is selected, the maximum amount paid at the time of loss is the value of the policy, even if the loss amount is larger than the value of the policy.

Personal Property Coverage Choices
Depending on type of policy, the different personal property coverage options could be:
1. Replacement Cost Coverage
2. Actual Cash Value

What Does Insurance-to-Value Ratio Mean?
This is the relationship of the amount of insurance purchased to the replacement value of the property. It is important to have an accurate assessment of the replacement cost value of your home. If you do not, and then have a loss, the cost to actually replace your home may be more than your insurance policy will provide. That means you would be responsible for covering the difference. Major catastrophes, such as earthquakes, hurricanes, and wildfires can often create a demand surge for materials and labor, resulting in increased costs to replace damaged property. This must be considered when establishing the appropriate replacement cost for your property.
Most property policies require that the property be insured to at least 80% of the replacement cost, or loss payments will be reduced by a proportion of the insured value to 80% of replacement value. This is referred to as the coinsurance penalty.

It is also important to realize that other limits within your policy are a percentage of the dwelling coverage amount. For example, the limit of coverage for your personal property will usually be at 50% of the dwelling limit. Additional coverage is available via endorsement, and is typically increased if you purchase replacement cost coverage for your contents.

Replacement Cost Coverage
In order to qualify for replacement cost coverage, you will most likely be required to insure your property to at least 80% of the replacement cost. As long as this requirement is met, and if you have a total loss, your insurance policy will cover the total cost of replacing your home. Further, if the property is not insured to at least the 80% value, then the payment for partial losses may be reduced.

Additional Limits in Case of Total LossMany insurance companies offer an endorsement that will provide the full coverage to replace the property in the event of a total loss. Usually, the company requires that the property be insured to at least 100% of the replacement cost of the property in order to qualify for this additional coverage. As long as this requirement is met, if you have a total loss and it costs more to replace than your limit (from a misestimate or demand surge), your insurance policy will be increased. The amount of the increase depends on the endorsement purchased, and can be anywhere from 25% to 100%.

Optional Coverages
Additional coverages may either be included in your policy, or available for a separate price. Coverages like building code upgrades, which provide coverage for upgrades that the community requires for building codes when a home is being repaired or rebuilt as a result of a covered loss, may be available separately. Also, optional coverage for perils, such as earthquakeinsurance, is often purchased to supplement a homeowners policy.
More Property Insurance at Homeowners Insurance Guide

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