Learn what homeowners need to know about adequate property insurance limits.

Underinsurance. One word that seems self-explanatory, but in fact, is woefully misunderstood. So much so that some homeowners believe their property limit should reflect market value, rather than the cost to repair and/or replace. An underinsured homeowner’s policy limit could result in a claim payout for a covered loss reduced by thousands of dollars. How could that be?

The standard homeowner’s insurance policy includes an insurance to value (ITV) clause, also known as co-insurance clause, or some variation thereof. Subject to the caveat that the language of each individual homeowner insurance policy always applies, traditionally, the threshold percentage in the standard homeowner’s insurance policy has been 80% of replacement cost. In order to avoid the co-insurance penalty, the home must be insured for at least 80% of its current replacement cost (not its market value). In the event of a covered loss, if the home is not insured to 80% of current replacement cost, the insurance company payout would be limited to either actual cash value (ACV) or a percentage of the amount for which the home should have been insured, according to policy terms. In either case, the penalty is huge in terms of diminished loss payout dollars.

HOMEOWNERS BEWARE:

1. The market value of your home is not the current cost to repair or replace damage due to a covered peril. While labor and material costs are the primary components of replacement cost, they are each subject to upward pressure due to factors such as:
   • Inflation
   • Supply chain disruption
   • Amenities of home, such as custom architecture/design, finished basements, and other upgrades
   • Age of home
   • Costs to meet current local building codes
   • Debris removal costs
2. Failure to meet your individual policy’s required ITV percentage will result in a co-insurance penalty or variation thereof.  It is very important that homeowners provide prompt notice of any material upgrades to the dwelling or other covered structures to their insurance representative, in order to maintain ITV requirements. For added protection, homeowners may consider purchasing an Extended Replacement Cost Endorsement, applicable to the dwelling only. Usually, the percentage of this Endorsement is 125%, and it allows up to 125% of the dwelling limit for repairs due to a covered loss.
3. Actual policy terms, conditions, and limits always apply. The policy language of different homeowner insurance companies varies. Read your homeowner’s insurance policy, and contact your insurance representative to ensure your home is properly insured.

There’s a parallel between an unaware swimmer getting caught in a rip current and an uninformed homeowner not maintaining property limits which satisfy ITV requirements. Both subject themselves to serious danger; one to life jeopardy, one to significant financial loss. By the time an unaware swimmer and an underinsured homeowner realizes he/she is at risk of extreme loss, it is too late. Just as a responsible lifeguard will warn against swimming in areas with rip currents, a responsible independent insurance agent will strongly advise against underinsuring property.

The Trusted Choice Independent Insurance Agents at Richey-Barrett Insurance are an experienced and knowledgeable source for handling your homeowner insurance account.