When looking into home insurance programs, you will come across the term “Replacement Cost.” What does Replacement Cost mean? It means the policy pays you to replace your damaged property with new items and materials of the same kind and quality of damaged property. It also means the damage isn’t depreciated—this is the best pay out option you can get when you have a claim. For example, a hail storm comes and damages your roof. An adjuster comes to your home and agrees you have hail damage. The policy pays the total cost to replace the damaged roof. Duh- that’s how it’s supposed to work, right? Yes, if you carry Replacement Cost—that’s exactly how it will work. But what if you don’t have Replacement Cost coverage?
The alternate to Replacement Cost coverage is called “Actual Cash Value.” Actual Cash Value doesn’t pay the full value to replace what was damaged. Actual Cash Value brings depreciation into the claim pay out equation. Let’s take the same example—a hail storm damages your roof but this time you don’t have Replacement Cost coverage, you only have Actual Cash Value. The adjuster agrees you have hail damage but the adjuster also says your roof has depreciated by 50% of it’s replacement value, therefore we are only paying you the value of the roof at the time of the loss. That’s how basic insurance policies work, they indemnify you for what you had. In this scenario, the other half of the claim would be paid by you. Replacement Cost coverage picks up the additional costs to repair the whole roof whereas Actual Cash Value only pays for the value of the property at the time of loss. Unfortunately, many homeowners learn this lesson the hard way.
Replacement Cost is the best option for a homeowner but you must cover your home to 100% of it’s replacement cost value. OK, so where does that number come from? Homeowners insurance companies have created what’s called replacement cost calculators. These calculators take into account the square footage, materials of home, zip code, and labor to generate a dollar amount that they believe would be sufficient to rebuild the home board by board and nail by nail. As a result the coverage limit on the home will be way higher than it’s Actual Cash Value. The replacement cost is it’s own number—it is not to be confused with a market value. The homeowners insurance policy only cares about the cost to replace the home, not for what you can sell it. In order to ensure there is enough coverage, many companies include an endorsement that gives an extra 25% of the Replacement Cost in the event of a loss. This means your policy now has the ability to pay out up to 125% of the Replacement Cost.
There are many confusing terms associated with insurance. We are always available to help our clients understand the terms of homeowners insurance. Call Hennessey, Thames and Leavitt Insurance Agency today to discuss homeowners insurance and ensure you are adequately protected. You’ve worked hard for your home and we will work hard to protect it. Call us at 601-636-5560. You can visit us on the web at www.leavitt.com/vicksburg . Stop by our office at 1001 Belmont Street Vicksburg, MS.