More often than not I run into Policy Holders that merely pay their premiums every month and actually do not understand what coverage they may or may not have. They buy insurance solely on recommendations from friends or family, listen to the sales agent and assume they are properly covered for whatever may arise. Reading a homeowner’s insurance policy for the first time can be intimidating. With all the jargon, exclusions, and conditions you’ll encounter, you may think that Mom was right–you should have gone to law school.
Your Homeowner’s policy consists mainly of preprinted pages–it’s pretty much a standard form. There are six types of policy forms: HO-1, HO-2, HO-3, HO-4, HO-6, and HO-8. These forms provide identical liability coverage but differ regarding the extent of property coverage and the structure involved (i.e., house, apartment, condominium). Be aware that homeowner’s insurance does not cover certain perils (flood and earthquake damage). So, you may need to purchase an endorsement or a separate insurance policy to obtain broadened coverage.
How much will your insurance company pay if there’s a loss?
How much should you be expected to pay after a loss?
Your policy contains a paragraph describing the amount you can expect to receive from your insurance company if a covered property loss occurs. The most common options for calculating payments are the following:
- RCV or Replacement Cost Value: This is the amount needed to replace or rebuild your property or repair damages using similar materials to what you had before. To qualify for replacement cost coverage, you will most likely be required to insure your property to at least 80% of the replacement cost; there’s usually a maximum dollar amount. (By paying a higher premium, you may obtain guaranteed replacement cost coverage, which specifies no maximum dollar amount.)
- ACV or Actual Cash Value: This is the amount needed to replace or rebuild your property, minus depreciation, which will be explained next. Typically, personal property will be reimbursed at actual cash value. The calculation method depends on the property (home or personal property) and the dwelling. Remember, you must satisfy a deductible (pay a certain amount out of pocket) before your insurance company will reimburse you for a loss.
- RCC, Replacement Cost Coverage and Depreciation Coverage all have the same meaning. Your dwelling and most of its contents – such as your roof, furniture, and even your computer may lose value over time due to age, wear and tear, etc. This loss in value is commonly known as depreciation. Under most insurance policies, claim reimbursement begins with an initial payment of the Actual Cash alue (ACV) of your damage or the value of the damaged or destroyed item(s) at the time of the loss. If you have (Depreciation)-replacement cost coverage included on your policy, you may be entitled to additional money to cover the depreciation of these items. If so, reimbursement may involve two or more payments – one for your initial payment based on the ACV of your items and then additional payment(s) once you repair and/or replace the damaged or destroyed items. Have depreciation coverage or at the very least ask your insurance agent how much more this coverage would add to your premium because if a major loss occurs, this will save you money.
- Ordinance of Law Code Upgrade Coverage is another very important coverage that could leave a policyholder high and dry in cases of a significant loss. The cost of meeting new building codes means most standard home insurance policies don’t cover the expense of bringing the house up to current codes if the structure didn’t meet the latest regulations before disaster struck.
Read your policy carefully and ask questions. Don’t just put it away in a file cabinet until it’s needed. Understand your rights and responsibilities before a loss occurs. If any part of your policy is unclear, ask your insurance agent about it quickly. If he/she cannot give you a clear understanding, request to speak with someone who can. If an insurance agent misrepresents the coverage being provided when selling you your policy, the insurance company must honor the coverage representations made by their agent. When hiring a contractor to perform the repairs on any loss, please remember it is a Federal Offense and fraud for the Policy Holder to profit financially from a loss and the contractor to discount any portion of the Insurance providers approved amount from the final cost IE, covering or absorbing your deductible.