Watch Out! Must have 100% coverage on home replacement

[MortgageQueen]

Any insurance wizards out there?
I am renewing my home insurance and was getting quotes based on my old policy.
I found out that if ANYONE has not insured their home for 100% of it's value the insurance company doesn't have to pay out the amount stated in your policy.
This is what my broker has told me. For example, my old policy said it would cost 357k to "replace my home. But my broker says in reality, my "current" replacement cost would actually be 427k.
She said if I kept the current amount on my policy(357k) the insurance company would likely only end up giving me 200k.(should house burn down or something)
It's in the fine print. . . she says.
Does anyone know anything about this?? Would love to hear from you.
Thanks!

[janelcd]

I was an underwriter for quite a number of years, but have been away from it for quite a while. Because the "rules" are always changing, it would be best that a person currently in the business reply to this.

"Replacement cost coverage" has been around for a long time and I'm surprised that your current broker hasn't brought this to your attention. I'm glad you're shopping around. A good broker will communicate with you annually at your renewal time. Good thing you're getting quotes elsewhere and haven't had the bad fortune of a claim on your dwelling.

This isn't your situation, but it really bothers me when I hear people say how "cheap" their insurance is. You get what you pay for!

I check with a couple of lawyers to see what companies are best to deal with both in home and auto. I started doing this after I was a passenger in an auto accident and found out very quickly that I was insured (no fault) with the WORST company out there. It was 7 years of hell because of the insurance company I was insured with.

Good luck.

[MortgageQueen]

Hi Jane!
Thanks for the reply. What I'm trying to understand is this whole "you don't actually get amount your insured for" thing. I find it bizarre. If you've insured your house for 100k then that's what you should get, no?. . .not 50k. . . just because you weren't dead on with the "actual" replacement cost?
I can only imagine how many people out there are blissfully unaware of this.

[janelcd]

It sounds like they're depreciating the dwelling which doesn't make sense. Like I said, I've had "replacement cost" coverage for a long time and about 10 years ago, I had a flood and didn't have to pay a cent. They sent antique furniture to be refinished and told me to go out and buy the other pieces. So I actually updated a few pieces of furniture because I had the "replacement cost" coverage. Was sure glad I had the proper coverage.

[janelcd]

One thing to keep in mind is that if a house burns down, you still have the property and foundation. Also, replacing a house and selling a house are 2 different values.

[miztia]

One thing to keep in mind is that if a house burns down, you still have the property and foundation. Also, replacing a house and selling a house are 2 different values.

Ahh good point. When i was looking for insurance and questioning it, my dad told me your "property cant burn down", just the house and garage...

[MortgageQueen]

It sounds like they're depreciating the dwelling which doesn't make sense. Like I said, I've had "replacement cost" coverage for a long time and about 10 years ago, I had a flood and didn't have to pay a cent. They sent antique furniture to be refinished and told me to go out and buy the other pieces. So I actually updated a few pieces of furniture because I had the "replacement cost" coverage. Was sure glad I had the proper coverage.

I'm glad you mentioned depreciation. My insurance broker mentioned that. So on one side they'll give you waaaay less then insured for and on the other side they want you to "up" the policy in order for me to get my house rebuilt???? Wow. I just am struggling to understand this. . .

I've had a major incident that I needed my house insurance for, a long time ago. . . but it sounds like a total replacement (as in rebuilding from scratch) is another story.

[Eeyah]

One thing to keep in mind is that if a house burns down, you still have the property and foundation. Also, replacing a house and selling a house are 2 different values.

I was going to mention that too Just because your property taxes say your house is worth 500K (alot of people base there figures off of there tax info) your lot may be worth 150K, therefore your house is worth 350k.

Another thing to remember - DH and I built our house (with a builder) but DH did all of our electrical 17-20k worth, and we did our own flooring, and paid cash for a few other upgrades, so we needed to remember to ADD that number to the cost of our mortgage when we were shopping for insurance. In the end the value was about 50K more than the mortgage, we figured it out in time to correct the insurance policy, but it was something that we didn't really think about.

[littlejalapeno]

I have been an Insurance Broker for over ten years in Ontario. If you knowingly misrepresent the details of the property to obtain a lower rate ie. tell the insurance company you have a 1500 sq foot home rather than a 2000 sq foot home then yes, in the event of a claim you may end up in litigation in order for the insurance company to pay 100% of the replacement cost. It is very unlikely that a claim would be denied.

It is also a common belief that the foundation is re-used after a total loss (fire) Due to extreme heat & water damage the foundation is always removed and replaced. Keep in mind Market value and Insured value are completely different. An insurance company is rebuilding your home under "emergency circumstances" and does not have the benefit of buying in bulk like a builder.

I hope this helps. You will find if you are shopping around that the rebuilding cost will vary greatly from insurer to insurer. My advise would be to go with a carrier that offers guaranteed replacement cost.

I'm not sure what she means that you would only receive $200k it's in the fine print, that make no sense to me at all. The minimum you would get would be the amount insured for 357k and you may be responsible for the remainder.

[MortgageQueen]

Ahhhh. . .Thanks Little jalapeno! These are the answers I'm looking for. My problem seems to be I'm too honest! lol My broker has all the correct info. . .even the sq. footage of my deck!
That sounds much more practical - "guaranteed replacement cost". I will discuss this with my broker. If I find she's been playing games for her own profit, maybe I will contact you.
As a mortgage agent, my goal is always to do the best for my client and sometimes, i naively think others will do the same. sigh.
Thanks again for the helpful info.!

[kanewtz]

Does TDMM offer replacement cost? I think, with my current home insurance policy with them, my possesions depreciate over time.

Anyone have this option with TDMM? If so, what is the cost difference per month?

[MortgageQueen]

I found this on the internet and just copied/paste. Hopefully this is helpful. It sound to me like you could experience litigation problems in certain scenarios.
For example, what if real estate prices in your area were below average and your house was quite de-valued? How would this affect your insurance settlement? I'm wondering about all those poor folks out east that have gone through flooding. . .I hope their insurance policies stood up to their losses. . .
QUOTE:

There are several different methods by which your insurance company may calculate the amount it will pay you for a loss. Payment based on the replacement cost of damaged or stolen property is usually the most favorable figure from your point of view, because it compensates you for the actual cost of replacing property. If your camera is stolen, a replacement cost policy will reimburse you the full cost of replacing it with a new camera of like kind. The insurer will not take into consideration the fact that you ran three rolls of film through the camera every day for the last two years, causing a considerable amount of wear and tear.
In contrast, actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost - depreciation). It represents the dollar amount you could expect to receive for the item if you sold it in the marketplace. The insurance company determines the depreciation based on a combination of objective criteria (using a formula that takes into account the category and age of the property) and subjective assessment (the insurance adjuster's visual observations of the property or a photograph of it). In the case of the stolen camera, the insurance company would deduct from its replacement cost an amount for all the wear and tear it endured prior to the time it was stolen.

What Does "Replacement Cost" Mean?

The term "replacement cost" is defined or explained in the policy. Simply stated, it means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. This applies unless the limit of insurance or the cost actually spent to repair or replace the damaged property is less. Refer to your policy for the exact definition and explanation of replacement cost.

What is "Actual Cash Value"?

The term "actual cash value" is not as easily defined. Some courts have interpreted the term to mean "fair market value," which is the amount a buyer would pay a seller if neither were under undue time constraints. Most courts, however, have upheld the insurance industry's traditional definition: the cost to replace with new property of like kind and quality, less depreciation. Courts have varied in their rulings as to whether or not depreciation includes obsolescence (loss of usefulness as a result of outmoded design, construction, etc.).
UNQUOTE