The limit of insurance you have on your home does not receive much attention until some catastrophic loss happens such as the Californian wildfires or Katrina rolls in. This is probably because most losses are partial losses and seldom reach the policy limits or because the press does not get too excited about individual misfortune.
But your home is probably one of the biggest assets you have so understanding how it is insured and what would be paid out at the time of loss is important. For your California homeowners insurance, do you know the amount of insurance you have on your home? Do you know how it was calculated? Are you confident that it is the correct amount to fully replace your home?
Coverage A (dwelling amount) is the amount you would receive to replace your home in the event of a total loss. It was probably determined with the help of the agent who relies on the insurance companies replacement cost software created by a professional replacement cost service. This service takes into consideration current construction cost in a geographical area and the features of your home that would make your home unique in construction. If you have not been asked a slew of questions about your home (age, roof, heating, foundation, flooring type etc.etc.etc.) you probably have not have had an adequate replacement cost calculation and you may find that you are underinsured.
Who is responsible for being sure the dwelling limit is correct on a California homeowners insurance policy? Hard to believe, but it is the homeowners responsibility. The agent and company can help you but it is your responsibility to be sure the information used to calculate the replacement cost is correct. Always ask for a copy of the replacement cost calculation used in setting the amount of insurance and be sure to correct any discrepancies that you find.
Is there a factor that might help if the limit is too low? Yes, most home insurance policies will include extended replacement cost, typically 125% to 150%. What this means is that if your home is insured at $300,000 and you have 125% extended replacement cost you conceivably could collect an additional $75,000 in the event the policy limit of $300,000 is too low.
So why don’t I just insure for a lower amount knowing that I have extended replacement cost? Two reasons:
First, extended replacement cost is intended to protect when a unique situation arises such as Katrina or California wild fires wipe out a large number of homes. In these cases the material and labor are in high demand and the cost for these services skyrocket. You could find, as many did find, that underinsuring might have saved premium but they did not have enough to rebuild their homes.
Second, typical policy language include provisions that must be meant to receive the extended replacement cost: Review your policy, but typically found are:
- Insure the dwelling to 100% of its estimated replacement cost as agreed by the insurance company. This means that their replacement cost calculator was used and you gave the correct information to make the calculation. This is why it is important to review the replacement cost calculation.
- Agree to make yearly adjustments reflecting changes in the cost of construction for your area.
- Notify the insurance company of any addition or remodeling which increases the dwelling by more than $5,000.
Failing to comply with any of the requirements found in your California homeowners insurance policy may void the extended replacement cost provision. As you can see it is important to review your policy wording for replacement cost, understand what factors were used in arriving at the limit and to work with your agent to be properly insured.
Underinsuring to save a few premium dollars could cost you a lot more in the long run.