Floods, storms and tornadoes inflicted billions of dollars in damage across the U.S. in 2019. Each disaster resulted in thousands of home insurance claims on everything from window repair and lost belongings to full rebuilds. 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 2020 beginning, 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.
Someone with ACV coverage who loses their entire house in a wildfire would likely pay tens of thousands of dollars out of pocket to rebuild. If your current homeowners insurance policy doesn't cover the full cost of replacing your home, you should consider increasing your policy limits this year. While this does raise your premiums, the extra coverage will be worthwhile if your home ever suffers significant damage.
Do you have home or hazard insurance?
Many people don't understand the difference between home and hazard insurance. Unlike hazard insurance, standard home insurance (HO-3) includes personal property and liability coverage as well. This is vital if your possessions are damaged, 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. However, you would receive nothing for damaged personal property or structural damage done by an unnamed peril.
If your current policy only includes hazard coverage, you should consider whether you're truly comfortable paying to replace all of your possessions out of pocket: your TVs, furniture, laptops and more. Next, consider the sum all of your financial assets that would be at risk if someone were to successfully sue you for an injury.
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.