"Replacement Cost" Home Insurance - Is It Really?

Eric Kossian (Leavenworth Insurance) — Tue, 31 Jul 2007 16:01:08 -0500

Most people think that the "replacement cost" they have on their home insurance means that the home will be replaced if there is a total loss. Unfortunately, this is not an accurate understanding. An estimated 95% of home owner policies with "replacement cost" actually limit the amount of replacement cost to 20% or 25% more than the amount showing on your declarations page. The difference can mean a very substantial amount of out of pocket cost to the home owner. For example, the Insurance Journal reported on July 19th, 2004 that "State Farm customer Pam Mitchell had a policy for $358,195. Her home had burned in a wildfire and State Farm estimated the replacement cost to be $782,000. While there may have been some coverage for debris removal, building code changes and other extras," there was probably still a substantial out of pocket loss to the customer.

In fact, nationwide, about 20% of total losses exceed the replacement cost amount. The Insurance Journal reported, "In 2003, California reported that about 600 State Farm policyholders like Pam Mitchell lost their homes and between 40-50 reported being underinsured." In fairness to Stae Farm, these percentages probably apply to the vast majority of policies.

So how does this happen? What can a person do to make sure that their home is actually completely covered?

Insurance companies want to make sure that they are getting the appropraite rate for the amount of home they insure, so most limit the "replacement cost" by the 20-25%. Most further limit the amount that will be paid out, especially on homes over 15 years old, by "Building Ordinance and Law" coverage. Most policies limit BOL coverage to between zero and 10% of the dwelling amount to bring the home up to current code. Even on a partial burn, the whole house may be required to be brought up to current code, like indoor fire sprinklers, enclosed soffits, updated wiring, etc.

However, there are some companies out there that say in effect, "Hey, if we insure the home, we will replace it with the same size and quality home (no betterment - which is fair) and bring it up to current code." They transfer most of the responsibility for accurate replacement cost and building ordinace coverage to the company. (A customer still has to notify the company if they remodel or put an addition on the home and give accurate information.) This gives tremendous peace of mind to the customer. Afterall, how are they suppossed to know how much it will cost to replace the home? I have had customers have 4 builders come out and give an estimated replacement cost and the prices can easily vary by $100,000 or more, especially on nicer homes.

Look at the policy under Coverage A - Dwelling, it will tell you what you have. Ask your agent for a policy that provides "100% replacement, even if it exceeds the amount shown under the limit or blanket limit." Unfortuantely, there are a number of agent who don't know the difference and or don't know there is an "Unlimited Replacement Cost" policy available. If the agent doesn't have it, you may want to find another agent; in the event you need it, you will be glad the insurance you are paying for will actually replace your home.

Eric Kossian, is the owner of Leavenworth Insurance in Leavenworth, Washington. He was an Insurance Underwriting Specialist with a major insurance company before starting his own independent agency which specializes in providing "Unlimited Replacement Cost" home & auto insurance for customers throughout Washington State. He can be reached at (877) 548-5488 or by email at leavenworthinsurance@gmail.com.

Your Good Credit Score Can Save You Up To 50% Off Home Insurance

Eric Kossian (Leavenworth Insurance) — Wed, 24 Jan 2007 20:45:42 -0600

I know a lot of people don't like this (the one's with bad credit) and I agree that it is not fair for those otherwise credit upstanding citizens who, due to no fault of their own, had a divorce or family medical situation that ruined their credit. Nevertheless, the truth is, from an actuarial standpoint, people with excellent to good credit can get huge discounts on home, auto and excess liaiblity insurance becuase they are statisically much less likely to have a claim (and that's what insurance companies are ultimately concerned about - not your driving record, etc)

So, if you have excellent to good credit I suggest you shop your insurance because while almost all preferred companies now give discounts for good credit, the amount of the discount varies widely. I literally had a customer with very good (not excellent or just good) that sold his home to a friend and retained the mortgage. The friend had terrible credit due to the wife's medical problems. The price of the insurance on the same exact home went from $400's to $970!!!

If you have poor credit do whatever you can to improve your credit score! You can get a FREE credit report annually (by law) by going to www.annualcreditreport.com. And you can stop getting credit card mail (that tempted you to rack up bills you could't pay by calling 888-568-8688. While you are at it you can get on the national DO NOT CALL LIST to stop telemarketers from calling both land lines and cellphones - you have to dial this number from each phone! - 888-382-1222 and repeat this every 5 years or everytime you get a new number. By the way, it is only for residential numbers; business numbers are exempt. Clean up your credit report by paying old bills off or calling the creditor to set up payments or negotiate a reduction, pay ALL your bills within 30 days (the people with the lowest credit scores pay all bills as soon as they arrive in the mail - you want good credit? - do what they do - that way you are never late.) Then shop your insurnance. For that matter, you may save money by shopping your insurance now while your credit is poor too. If you have no idea how to get your finances in order, get the book, Your Money Or Your Life - it's a classic and it's the best (and you don't set up a budget!!!). It will tell you exactly how to go from whereever you are at to getting on the road to financial independence (say that 3 times slowly - doesn' that have a nice sound to it?) Good work! (there is no luck involved - you can do it!)

Eric's Blog

"Replacement Cost" Home Insurance - Is It Really?

Your Good Credit Score Can Save You Up To 50% Off Home Insurance