How confident are your that your home is adequately insured? The best part of my job is being able to help an insured recover from a loss. I can’t imagine the pain an insured would feel discovering after a loss that you’re not covered for that or that you don’t have enough insurance to fully pay for that loss.

The average consumer needs to save a buck. There’s nothing wrong with that except when skimping leaves you exposed. Consumers commonly take lower insurance limits or decline a coverage in attempts to save a few dollars.  If they make those decisions after being educated about the value of a coverage or the need for a specific limit, then it’s their choice. When you decide to go with a $1,000 homeowner deductible versus a $500 deductible, the savings may be nice at the time of purchase but after a loss you might find yourself second guessing your decision; but you made a decision that most can recover from. The same is NOT true for the Replacement Cost coverage limit chosen for your homeowner policy.

It is a common perception that the Replacement Cost limit most insurance companies set for your home is excessive. Understanding how that is calculated and what is covered may make that a little more palatable. It is not the same as what your home would sell for on the real estate market.

Most policies today offer Replacement Cost Coverage. At the time of completing an application, your agent is required to complete a formal Replacement Cost Estimate. There are only a few companies that insurers use for these programs, but they all draw from the formula developed by Marshal, Swift, Boeckh. These are software programs that include the multiple factors affecting the construction costs incurred when replacing your home.  These programs are adjusted by zip code to reflect local costs for labor, construction materials, and weather factors. 

The weather has a greater impact on those costs than you might consider; local seasonal factors are the most common weather influence. As a New Englander you’d expect the snow, ice and cold of winter to impact the post loss restoration time.  Should a summer hurricane also impact the cost to restore your home?

“Supply & demand” affects the availability of the building materials, contractors, and the price paid for projects. How many roofs after a hurricane will have missing shingles? How many roofing contractors are there around? How fast can the shingle manufacturers get shingles to the suppliers? The floods of 2011 and the ice dams of the winter of 2015 showed Rhode Island how long it took contractors to complete their repairs. Through historical experience, this factor is included in the insurance company’s calculation of your home’s replacement cost.

CoreLogic, another leading provider of Replacement Cost Estimator software, recently reported on a 2 year study of Northeast Atlantic storms, Gulf Coast hurricanes, the wild fires of California, and the Oklahoma tornadoes. The study concluded an increase of 5.6- 7.6% was the norm, with some areas far exceeding that average. They singled out the northeast as the exception to the norm.

When a catastrophic storm hits an area the mortgage industry expects no less than a 10% increase in foreclosures for the area. This is commonly attributed to people not having insurance or having inadequate limits.

To further assure your home is properly insured, most homeowner policies today include a provision for the insurance company to pay up to 125% of the replacement cost listed on your policy after a loss. There are two catches to that; it applies if we have documented that value through a replacement cost estimation program approved by their company and you have insured the home to that value. That extra 25% is intended to protect you against rising construction costs during your policy year as well as the “supply and demand” surge after a region wide occurrence.

 If your policy does not have that 125% provision, you likely have a set policy limit which is the maximum the insurance company will pay in the event of a loss. With that, your policy likely has a “co-insurance clause” requiring you to insure your home to 80% of its replacement cost at the time of a loss. If you fail to insure to that 80%, there is a penalty that will be applied when, and if, you have a loss. The way it is calculated affects your recovery for a full or partial loss.

An example of how this co-insurance penalty can “burn” you was experienced by a young Foster couple I know. Using rounded figures for my example, their home was a total loss after a fire. The insurance company determined that the replacement cost of their home at the time of the fire was $300,000. They were only insuring it for $180,000 or 60% of its replacement cost. Under the terms of their policy, because they only insured the home for 60% of that value, they were only able to recover 60% of the amount listed on their policy; the $180,000 they were expecting turned out to be $107,500. (Calculated as $180,000 x .60 less their $500 deductible.)

Most homeowner losses are not total losses. A kitchen fire may end up being a $50,000 loss after removing the water damage associated with fighting the fire, cleaning and repainting the smoke damage throughout, and repairing or replacing your kitchen.  After a hurricane many homes will escape with only missing roof shingles. Those are both partial losses subject to the “co-insurance clause”.  Assuming the same $300,000 home value and $180,000 policy limit, 60% of a $50,000 loss after a $500 deductible results in a $29,500 loss payment; not the $50,000 you might have expected!

Insurance is not as simple as the TV ads would like you to believe. There’s a reason insurance agents in RI have to be licensed. Hearing horror stories of how someone did not make out well after a loss only serves to give me material to reference in future articles!