‘Insure To Value Insurance Clause’
In each homeowner’s policy, there is an “Insured to Value” clause. Even though this clause is always there, few agents or companies take the time to educate their customers on what it means.
The Insured to Value clause states that in order for your insurance company to fully replace your home, it must be insured for greater than 80% of the amount (many insurance carriers make it 100%) it would take to rebuild your home at today’s costs. This is very important and is one of the biggest reasons why people with insurance still cannot afford to rebuild their homes after a loss.
Put simply, people invest in homes because homes increase in value. If your insurance policy does not reflect the increasing value of your structure, you could be at risk.
Don’t Get Penalized for Being Underinsured
If you insure your home for less than its full replacement cost, you need to be aware of two possible claim penalties.
1. The first penalty occurs if you are underinsured for a total loss (the complete destruction of your home). Let’s say your home, which you insured
for $250,000 ten years ago, burns to the ground, and the current cost to rebuild your home is $500,000. Since your home was only insured for $250,000, you suffer an out-of-pocket loss for the remaining $250,000.
Why? This is the result of your policy not meeting the requirements of the Insured to Value clause. In other words, it was not insured for at least 80% of the replacement cost and disqualifies you from receiving the Extended Replacement Cost Endorsement to fully rebuild your home.
2. The second penalty for underinsurance occurs when your home has a partial loss. Using the same example as described above, say you insured your home 10 years ago for $250,000, but the cost to rebuild your home today is $500,000. Let’s imagine a kitchen fire with extensive smoke and water damage, resulting in a $150,000 repair bill. You are insured, so you file a claim with your insurance company, only to discover that they will pay you $100,000. You’re out $50,000.
Why? The vast majority of homeowner’s policies will only pay the full cost to replace partial damage to your home if you insure your home for at least 80% of the current cost to rebuild a new one. If you insure your home for less than 80%, your claim settlement will be depreciated.
Put simply, homeowner’s policies essentially state that if you insure your home for a depreciated value (in this case $250,000), then the insurance company will settle with you on a depreciated basis.
To ensure that you are protecting your investment, you must always insure your home for 100% of the cost to rebuild it today. Most insurance companies will not let you insure your home for less than 100% replacement cost when you buy a policy, but it is up to you to make sure you keep up with building cost inflation after you buy the policy. It is dangerous to sit on your policy year after year assuming it is still adequate.
Here is the formula the insurance company uses to determine if you insured your home correctly.
Did ÷ should = % x amount of the loss – the deductible = the amount due
You take the amount for which the home is insured and divide it by the replacement cost value of the home. This will result in a % amount. If that % amount number is 80% or more, you can stop. Your home is insured to value, and a coinsurance penalty will not be applied to your loss. If that % amount number is less than 100% you will then multiply that % number by the amount of the loss. You will then subtract your deductible and that will result in the amount due*. See below.
You did insure your home for: $100,000.00
You should have insured it for: $200,000.00
You have a loss which totals: $50,000.00
Your deductible was:: $1,000.00
$100,000.00 / 200,000.00 = 50% X $50.000= $25,000.00 - $1000.00 = $24,000.00
As you can see in the above example, the insured did not purchase enough insurance and their $50,000.00 claim suddenly turned
into a $25,000.00 claim. The insured could receive a coinsurance penalty of $25,000.00. Bummer!