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Homeowner’s Coverage: What you should know about what’s available and how much you should have to protect yourself
Now that you’ve bought the home of your dreams, what should you be doing to protect that home and your contents from a potential loss and how much coverage do you need to fully protect yourself?
Whether it’s a hurricane, fire, or any other kind of peril, the type of insurance coverage you choose, the amount of coverage you choose will have an impact on any potential claim you may make.
So, to help you in the decisions you need to make, let’s first talk about the type of coverage you should consider for your homeowner’s policy.
Under Florida law, FS 627.7011, insurance companies are required to sell a policy providing
“A policy or endorsement providing that any loss that is repaired or replaced will be adjusted on the basis of replacement costs to the dwelling not exceeding policy limits, rather than the actual cash value…”
However, under the law as it was changed in the 2011 Legislative session, insurance companies may now offer two types of “replacement cost” coverage for a personal property loss.
Before we discuss the two types of replacement cost coverage for personal property, let’s discuss how replacement cost coverage will work when a loss to your dwelling occurs.
If the loss to the dwelling is a total loss, the insurance carrier must pay the full replacement cost without any reservations or any depreciation in value. However, if the loss to the dwelling is repairable, the carrier must initially pay only the actual cash value of the loss, less any deductible.
Even though you have paid for replacement cost coverage, the carrier is not obligated to pay any remaining benefits necessary to perform the repairs over and above the actual cash value until such time as the repairs are performed.
Now, regarding personal property or contents coverage, as mentioned before, there are now two types of replacement cost coverage that can be purchased.
The first type of coverage we will refer to as traditional replacement cost coverage. Under the first type, which we expect will have a higher premium, the carrier must pay the full cost of replacing your personal property without any reservations or holdbacks for depreciations in the value of the personal property, even if you chose not to replace the property.
Under the second type of coverage, which we will call Hybrid replacement cost coverage, the insurance carrier may limit its initial payment to the actual cash value of the personal property to be replaced, and will require the insured to provide receipts for the purchase of the replacement property before issuing any additional cash for the next purchase.
For example, the carrier might give you an initial check for $10,000.00, this amount being the actual cash value of the personal property you are replacing. You are then to use that $10,000.00 to go out and buy your replacement property. Obviously, the $10,000.00 will not cover the cost of all of your personal property. As such, you are to turn in your receipts for the property you purchased with the $10,000.00 in order to receive an additional $10,000.00. You are supposed to continue doing this until such time as you have either replaced all of your personal property lost in the claim OR you have reached your policy limits.
Here’s where choosing the Hybrid coverage can cause problems. What if you had a collectible item, something like a guitar autographed by Eric Clapton. How would you go out and replace that item? Instead, you would receive actual cash value for the item. Meaning, you would receive only the cost of the guitar itself. Another problem with the Hybrid coverage is that the statute says it will pay for replacement “of insured property”. This means that if you had a sofa that was destroyed and wanted to replace it with two chairs, under a strict reading of the statute, you could not do so, being limited to the sofa.
Finally, it is important to remember that both of these claims will only be paid up to the amount of coverage purchased. So if you purchased coverage for the dwelling in the amount of $100,000.00, yet the cost to repair the dwelling was $120,000.00, the carrier would only be responsible for the $100,000.00 of coverage purchased. If you had $75,000.00 in personal property/contents coverage, yet it would cost you $100,000.00 to replace your contents, you will be responsible for the balance.
An additional component in the coverage of your dwelling is something called “Law and Ordinance” coverage. This coverage provides additional funds for those expenses or costs necessary to meet any applicable state laws or local ordinances that went into effect after the original construction of your home. For example, when your home was originally built, hurricane rated storm windows might not have been required. However, if at the time your home sustains a loss and that type of window is now required, this is the coverage that will make up the difference in cost.
Florida law requires your carrier to offer two coverage limits for this type of coverage – either 25% or 50% of the dwelling limit. So, if your dwelling limit was $500,000.00, you could purchase either $125,000.00 (25%) or $250,000.00 (50%). The choice between these two options is yours. However, in making your decision, you should consider how much the building codes have changed since your home was constructed. If there have been significant changes in the codes, you might want to consider the larger percentage option even though your premiums will be higher.
Now that we’ve discussed the type of coverage for you to consider, we need to discuss the amount. If you are like most people, you know you need to carry insurance, but you figure since you will never need it, why not get the bare minimum you need.
Certainly, we do not advocate buying more than you need, but we do advocate making sure you have enough to cover any potential loss.
A common mistake most people make is they think about insurance in terms of the amount someone would pay for their home if it were for sale. In this housing market, that is particularly dangerous, because even though the sales market for homes has bottomed out, the cost to build or repair a home has not dropped as significantly. In other words, while your 2000 square foot home may only be able to sell on the market for $150,000.00, the cost to rebuild that home today could be closer to $300,000.00. Therefore, if you purchased insurance based on what you think you could sell your home for rather than what it would cost to rebuild your home, should you sustain a loss, you could be underinsured by a significant amount of money, such as in the example just cited.
In addition, the amount of coverage provided under contents coverage, which is the coverage of your personal property, typically is tied to the amount of coverage you have purchased on your dwelling. For example, if you purchased $300,000.00 in dwelling coverage, your policy will provide for $150,000.00 in contents/personal property coverage.
Therefore, you must be very careful when deciding on the amount of coverage for your dwelling, as it not only will impact your ability to rebuild, buy also will impact the amount you have available to replace your personal belongs.
We hope this information helps you make a more informed decision regarding the purchase of residential property insurance. And remember, if you ever do need to make a claim, feel free to contact our office for help in answering any questions you may have.