In many instances, your home, apartment, or condo unit is one of the largest investments you will make in your lifetime. As such, it is important your home is properly insured for all its worth. Unfortunately, many homeowners may not have enough coverage should the unexpected occur. In the event the unforeseeable happens and you do not have enough coverage for your home, you could be responsible for out-of-pocket costs.
Your homeowners policy is made up of several different coverages which will protect you from different perils. One of those coverages is Coverage A, which is the protection to your dwelling/home’s psychical structure. We understand insurance coverages and terms can be quite confusing, as such, here is Penny to explain Coverage A. The first item listed on your declarations page.
When considering your Coverage A limits, it is important you know how much it would cost to replace your home should a total loss occur at today’s building costs.
Market Value vs Replacement Costs - Know the Difference
Speaking of coverage limits, many consumers believe their coverage limits are based on the market value of their home, as opposed to the replacement cost of the structure. When you insure your home based on its market value, you run the risk of having insufficient coverage.
Market values are based on factors such as location, neighboring properties, school zones, and property taxes. However, these factors do not have any influence on what your homeowners insurance policy covers. Replacement cost coverage is typically how Coverage A limits are calculated and defined as the cost necessary to replace your home and its contents with materials and labor at their current price.
Understanding the Difference
Although insuring your home based on its replacement cost may be more expensive in the short-term, you will be adequately covered should your home be damaged or destroyed. For example, a family buys a home for $200,000, and purchases a homeowner’s policy for the same amount of coverage. However, the replacement cost for the same home is $250,000. If an unexpected insured event, such as a fire destroys the home, the homeowners would be responsible for the applicable deductible as well as the $50,000 coverage shortfall, or forced to build a new, lower-priced home due to the difference.
We hope you take this information into consideration when reviewing your homeowners insurance policy. Should you be unsure about your policy coverages, your agent can assist you in determining whether you may need higher limits or additional coverage. For more information on home prices and replacement costs, read Florida Peninsula’s President, Clint Strauch’s article in Rough Notes.