Insurance and Real Estate : Make Sure Homeowner Coverage Covers All Loss

Most people believe that a replacement cost homeowner’s policy will replace their home if it is destroyed or damaged. This may or may not be true, depending on the type of policy they have.

Insurance companies use two technical terms to describe the homeowner’s policies they commonly make available, “replacement cost” and “guaranteed replacement cost.”

The first type of policy pays for the repair or replacement of your home only up to the policy limits on the declarations page. If, for any reason, you are not carrying enough insurance, the insurance company will not pay to completely rebuild your home. You must pay the difference.

The second type of policy will repair or rebuild your home even if the cost to do so is more than the policy limits on the declarations page. This is the best policy you can buy and is well worth any extra you might have to pay for it.

To avoid problems, it is important to make sure your homeowner’s insurance is written for an adequate amount of coverage. However, circumstances can arise where the coverage is inadvertently inadequate to rebuild. For example, you add on to your house and forget to tell your insurance agent to increase coverage, or the cost of construction in your area increases faster than the automatic inflation factor contained in most homeowner’s policies.

If your house burned down under these circumstances, the guaranteed replacement cost policy would allow you to rebuild. The replacement cost policy probably wouldn’t.