Thousands of homeowners saw their houses razed by the series of wildfires that swept across California late last year. Undoubtedly, most of them had some form of home insurance policy in place that will now help them to rebuild their lives. However, the broad discrepancy in reimbursement that various homeowners receive may surprise you.
Some will see their home and property totally replaced—brick for brick, item for item—by their insurance company. Others may receive a check that covers only a portion of the costs. Unfortunately, some from the latter group might not have realized that they didn't have enough coverage until it was too late.
With most of 2018 before us—and such stark examples of unexpected home loss—we believe that now is an excellent time to conduct your own homeowners insurance checkup, to make sure you have the coverage you'll need if your home is damaged this year.
What are your policy's limits?
While most home insurance policies cover the structure of your home, the fine print of your policy will reveal how much you'll actually be reimbursed if your house is destroyed. Policies describe their hazard coverage limits with one of three terms, and the payout that’s implied by each term can make a huge difference to homeowners.
The three types of coverage limits
- Actual Cash Value (ACV): The ACV is the market value of your house, minus any depreciation. It's possible that the value of your land may have increased since you bought it, but specific elements of your house, such as the plumbing or floorboards, have aged, and therefore may have depreciated in value. Because of this, the ACV likely won't cover the entire cost to rebuild your home with new materials.
- Replacement Cost Value (RCV): The RCV is the amount it will cost to rebuild your house at the current prices for labor and materials. A policy that covers your home's RCV will have higher premiums than one that covers only the ACV, but it could provide a substantial amount of additional reimbursement if you need to replace all or a part of your home. However, a policy that covers the RCV is still subject to limits.
- Guaranteed Replacement Cost (GRC) / Extended Replacement Cost (ERC): The GRC/ERC of a home is like the RCV, but with a guarantee that the insurance company will pay a certain percentage beyond your policy's limits to rebuild your home. This is relevant if a regional disaster, such as a wildfire, temporarily drives up the cost of labor and building materials. However, this is the most expensive option.
A victim of the California wildfires that held a policy that covered the ACV of their home would likely end up paying tens of thousands of dollars out of pocket to rebuild their house. If your current homeowners insurance policy wouldn't cover the full cost to replace your home, you should consider increasing your policy limits this year. While an increase in limits will come with an increase in premiums, that extra coverage will be well worth the cost should your home face significant damage.
Do you have home or hazard insurance?
Many people don't understand the difference between home and hazard insurance. While standard homeowners insurance, such as an HO-3 policy, includes hazard coverage, it includes property and liability coverage as well. This type of comprehensive coverage is vital if your home and all of your possessions are destroyed, or if someone is injured on your property and decides to file a lawsuit against you. However, if you have an HO-1 policy, you only have hazard insurance. Hazard insurance, also known as dwelling coverage, insures only the structure of your home from the perils named in your policy. That means that if your home is destroyed, your insurer would help cover the costs of rebuilding your house and its attached structures. You wouldn't receive a dime, though, for any of your personal property that was destroyed with the home, or damage done by an unnamed peril. If your current policy only includes hazard coverage, you should consider the worth of all of your possessions: your TVs, furniture, laptops and more. The total probably amounts to a significant sum of money. Next, consider the sum all of your financial assets that would be at risk if someone were to be injured at your home and then successfully sue you. The resulting legal fees and medical costs could exceed your entire net worth. These are the types of risks from which you're protected under a homeowners insurance policy. In most cases, a comprehensive home insurance policy is worth the additional premiums you’ll need to pay.
Are you using the best company?
You may be surprised by the rates you find if you shop around for the best rates offered by home insurance companies. However, rates alone do not imply the best deals. When shopping around, look for the factors we consider when comparing insurers, which include affordable rates, the best customer service and the highest claims process satisfaction score. While it might not sound like the most enjoyable exercise, beginning the year with a homeowners insurance checkup can help you uncover critical areas where you're underinsured or overpaying. If your home is subject to an unexpected disaster, you'll be happy you planned ahead.