While exact percentages vary, experts warn that a growing number of homeowners are underinsured. Inflation, fluctuating building costs, depreciation, and often, a misunderstanding of valuation methods are likely contributors to this trend. As a result, the importance of properly assessing the value of a home and belongings cannot be overstated.
Valuation Methods
Understanding the difference between actual cash value and replacement cost doesn’t need to be complicated.
Replacement cost covers the cost to repair or replace the property with materials of the same or comparable quality (up to the limits established by the policy). If your client’s 5-year-old laptop is damaged by lightning, the cost of buying a brand new comparable model is covered.
Actual cash value covers the replacement cost less depreciation (a deduction to reflect the property’s age, condition, etc.). If your client’s 5-year-old laptop is damaged by lightning, the cost of buying a brand new comparable model less than 5-years of wear-and-tear is covered.
Homeowners sometimes opt for actual cash valuation for their policy because the premiums are a little lower (but so are the limits). Replacement cost is generally the more popular option.
Tips for Homeowners
- Create and maintain an inventory of personal assets, including serial numbers, date purchased, and price paid. Many helpful home-inventory applications can be found online.
- Re-evaluate coverage annually by checking the insurance policy against local building costs which can change dramatically from year to year. Check the policy for an inflation guard clause as well.
- Use a video to document the home’s interior and exterior. Include appliances, mechanicals, flooring, cabinets, roofing and any other structures on the property.
- Consider a “rider” for high-value items like jewelry, furs, silver and other collectibles that might not be fully covered by the underlying policy. Estimate value/replacement cost and review and update annually.
The GUARD Wire is designed to provide general information about various topics of interest and should NOT replace the guidance, advice, or recommendations from licensed insurance or legal professionals, other industry experts, or state and federal authorities.
This blog is brought to you by Berkshire Hathaway GUARD Insurance Companies. Read the original blog here.