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What’s the Right Coverage Amount for Your House?

Mar 29, 2018 06:00AM ● By Pamela Johnson
I’d love to have a nickel for every time a client told me we were insuring their house for more than it was worth, and most of them were probably right. The problem is that your homeowner insurance carrier doesn’t care what your house is worth; they care only about what it would cost to rebuild it. Even if you insist you’d build a “lesser” house, your insurer is obligated, by policy language, to insure your house in line with what they think it would cost to replicate what you have, not what you might build in its place.

If your homeowner policy includes Replacement Cost (RC) coverage, it means your co-insurance value is 100%. Under these circumstances, your insurer believes your house is being insured for what they think it would cost to rebuild it. If you have less than 100% RC coverage, the lowest acceptable co-insurance value is 80% of RC. When a house is insured for less than 80% of its RC, it will be subjected to a penalty clause if and when a claim occurs. Let me explain.

When the co-insurance value is determined at claim time, if the percentage is below 80%, a penalty clause may be invoked.  Namely, your insurer has the right to settle your claim on par with the value for which you insured your house.  For example, if your house was insured for only 50% of its RC, the insurer has the right to honor only 50% of your claim.  Let’s face it--if you insure only 50% of the value of your house, why should the insurer pay 100% of your claim? This is the co-insurance penalty clause.

If you agree to insure your house for RC, your carrier will likely promise to pay you even more money than the coverage amount shown on your policy in the event of a total loss. Down through the years, our agency has insured two families whose houses were entirely destroyed by fire. Fortunately for them, both had RC and both collected even more than the coverage amount listed on their homeowner policy. They were properly insured.

Insurance companies want to insure your house to 100% of its replacement value.  They offer discounts as an incentive. You might assume insuring your house for only 80% of its RC will cost you less, but when you factor in the discount incentives to insure to 100%, its rarely the case. Insurance carriers know it’s in no ones best interest to be underinsured in the event of a catastrophic loss to your house.
It can be a difficult concept to accept insuring your house for RC when that value is more than the market value of your house, but it could cost you more than you know if the worst should occur.




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