There’s a certain degree of mental constipation that accompanies any discussion of insurance.
And even though insurance is something we all need, and are even required to have at times, few of us really understand how it works or to what extent we’re protected from life’s uncertainties. Finances are difficult.
Homeowners insurance is no different.
As a homebuilder, we’ve been uniquely positioned over the last twenty-odd years to bear witness to the best and worst examples of how homeowners insurance can either make a family whole after a tragedy or leave them worse off than before.
Thankfully, you do not have to be a tax expert to keep yourself – and your home – safe. You just need to follow a couple of rules when selecting a policy.
Our goal with this post is to alert homeowners and future home buyers (like you) to the importance of properly insuring your home, and to hopefully help our readers avoid the pitfalls of underinsurance. Instead of spouting off a long list of best practices for choosing a policy, we’re going to focus on a couple of key issues that are specific to repairing and rebuilding your home following a claim.
Replacement Cost Value vs. Actual Cash Value: Know the Difference
“There’s a fine line when it comes to homeowners insurance. Nobody wants to pay too much for coverage, until they absolutely need it.”
– Kenny Reinbrecht
In this industry, we most often see two types of home coverage, Actual Cash Value (ACV) and Replacement Cost Value (RCV). If you’re unfamiliar with either, here’s a quick explanation:
- Actual Cash Value: Coverage that pays up to the homeowner’s initial cost to build a home, accounting for depreciation based on the number of years you’ve owned it.
- Replacement Cost Value: Coverage that pays up to the cost to replace or rebuild a home to the exact same specs in today’s market, regardless of depreciation.
We encourage you to CHOOSE A REPLACEMENT COST POLICY, because cheaper isn’t always better, especially when it comes to homeowners insurance.
ACV insurance policies are cheaper for obvious reasons, but you’ll never receive the full amount you need to completely rebuild your home.
For example, if you’re “properly insured” with an ACV policy for $200k, but your home is 50 years old, your adjustor might determine you’re only eligible to receive $150k following a claim.
RCV policies, on the other hand, are designed to get homeowners back into new homes that are as nice as the ones they had before whatever disaster or “Act of God” destroyed the original. And with the addition of policy endorsements, homeowners can rebuild their homes to current codes.
Good insurance isn’t always cheap, properly ensuring your home is a vital part of responsible home ownership.
All Homeowners Need a “Code Rider”
One of the most important (and consistently overlooked) things you can do before finalizing your home insurance policy is to make sure you have a ‘Code Rider’, or a provision obligating your insurer to cover the cost to bring your home back up to code during a rebuild. Easily overlooked things like plumbing, electrical work, and even windows are subject to different best practices as time goes on. A code rider covers the extra cost to rebuild your home to present day industry standards.
Never Under-Insure Your Home
A house insured for $100k that cost $200k to build may not be rebuilt with the $100k your insurance company is obligated to pay you.
Simply put, if your home is under-insured, your insurance company is not obligated to pay for you to fully rebuild it.
Your home is your biggest investment. Try not to put yourself in a position to lose it.
Be aware of state-specific insurance laws.
For our regional readers, one particular insurance quirk to be aware of pertains to roof and siding damage. While it varies from state-to-state, insurance providers in Indiana are only required to replace the side of a roof or home that has been damaged. This can leave you, the homeowner, footing the bill if you’d prefer a full replacement — the only loophole being situations where your original roofing or siding is no longer available.
Location-specific laws like this highlight the necessity for homeowners to understand their insurance policies.
Talk to a Homebuilder or Contractor Before Settling with Your Insurer
People settle all the time for insurance claim pay-outs that look sufficient on paper, but won’t even begin to touch what it actually costs to repair or build a new home.
Remember: the right amount of insurance isn’t based on what it cost you to build a home, it’s what it costs you to replace it!
One of the best ways to ensure your claim has been properly valued by your insurance adjuster is to talk to your home builder, contractor, or another qualified home professional and get them involved.
So, at the end of the day, who’s responsible when things go wrong?
A good insurance agent should immediately see the holes in your coverage, but if you don’t listen to their advice? Well, then the responsibility is shared.
Do your research, learn what type of coverage you need, and be sure to understand the nuances of your particular policy. Do these things, and you’ll sleep a lot better at night knowing that when disaster comes knocking, you’ll be able to rebuild without taking a huge step backward.