When you buy homeowners’ insurance, you might think that your home is completely protected against disasters. This may or may not be true depending on the policy that you purchased. Home prices and construction costs change over time, and if your insurance limits don’t keep up, you may find yourself underinsured. Keep reading to learn more.
Excluded Events vs. Policy Limits
You may already be familiar with the idea that certain types of events need special insurance coverage. One of the most common exclusions from a general insurance policy that needs separate coverage is flooding.
Even when your home is damaged or destroyed by a cause covered by your general homeowners’ insurance policy, you may not be completely covered. These types of claims fall under your Coverage A limits. If your insured losses exceed your coverage limits, you’ll only receive up to your policy limit rather than the full amount of your loss.
Determining Your Coverage A Limit
Your Coverage A limit should be high enough to cover the costs of repairing or rebuilding your home after a disaster. This sounds simple enough, but there are several complicating factors.
Market Prices
One method of setting Coverage A limits is using a home’s market price. However, this often won’t match repair or replacement costs.
One of the biggest reasons why, is land values. Your home’s market price includes the cost of the land under it, but you don’t lose the land if your home is destroyed. If you’re in a desirable location in a hot market, buying coverage based on your home’s market price could lead to you buying more coverage than you need and overpaying. On the flip side, if you have an older home in a cold market, your home’s current market price might be less than what you’d need to rebuild it.
Replacement Cost
Setting Coverage A based on replacement cost is intended to get around the problem of fluctuating home prices not matching construction costs. Replacement cost is based on labor and materials prices rather than the selling price of your home.
However, even labor and materials costs for construction constantly go up and down. If costs have risen since you purchased your policy, you may be underinsured. If costs have fallen, you could be paying too much.
Closing the Gaps
There are additional insurance products you can use to make sure your Coverage A limit keeps up with what you’d need to repair or rebuild your home.
Inflation Guard Endorsement
An inflation guard endorsement automatically increases your policy limits with inflation. Rather than having a fixed dollar amount of coverage that you need to keep reviewing, this endorsement will help to match your policy limits to rising prices.
Extended Replacement Cost
You may also be able to purchase additional insurance known as extended replacement cost. If the cost to replace your home exceeds your Coverage A limit, this addon will cover the difference.
Ask Your Insurance Agent
Your insurance agent can help you calculate the coverage you need, deciding the best method of choosing your limits, and figuring out if you need additional coverage to close any gaps. Give Giuffre Insurance a call today.
