McQuiston: How Does Your Homeowner Policy Respond To Total Losses?

The Jemez Agency

While homeowner insurance covers individuals and families for many day-to-day claims involving water damage, roof damage, and the like, it is potentially there for you when the unthinkable happens and your house is completely destroyed.

Dozens of questions arise whenever a catastrophic circumstance occurs; however, there is one question you should ask yourself prior to such a situation: how will my homeowner insurance policy respond to the loss of my home?

Traditional homeowner policies have specific limits of insurance for the dwelling, detached structures located on the residence premises, and for contents. Once those limits of insurance are exhausted, additional payments cannot be made for property covered under the exhausted limit. However, several coverage enhancements have entered the marketplace over the years and homeowners now have additional options to guard them against the worst-case scenario of not having enough insurance coverage to adequately rebuild or replace their home.

For example, enhanced replacement cost options give the homeowner an additional percentage (typically 25% or 50%) above and beyond the dwelling limit of insurance if needed to rebuild or replace their home of like kind or quality in the event of a total loss.

After having seen a few total loss situations over the years, this extra amount may be needed for rebuilding or replacing with a like kind quality home. Contractors may not give discounts when they know an insurance company is writing the check to rebuild a home. Plus, when homeowner developments are built, materials are being purchased in bulk at a discounted rate. The same doesn’t apply when materials for a single home are being purchased.

Homeowners can take things a step further and purchase guaranteed replacement cost coverage as opposed to enhanced replacement cost coverage. If certain policy provisions are met, this type of setup will pay an amount necessary to completely rebuild your home with a like kind quality home in the event it is destroyed.

In either case, the insurance company will require you to

properly insure your home to what they believe is an accurate replacement cost amount at the time the policy is issued. This is accomplished by entering your home’s characteristics (year built, square footage, exterior wall materials, etc.) into a software program that calculates replacement cost figures based upon current construction costs.

One last thing to investigate is whether or not your policy has a cash-out provision. This allows you to receive a check for the replacement cost up front after a total loss instead of an initial actual cash value payment taking into account depreciation; therefore, you don’t have to rebuild or replace your home to receive a replacement cost payment if your insurance policy includes this feature.

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