Are you really insured for replacement cost?

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What exactly does it mean to be insured at replacement cost? The typical Insurance Services Office (ISO) Homeowners policy (HO-3 10 00) insures the Dwelling at replacement cost (RCV) and your Personal Property at actual cash value (ACV). This is often modified with the addition of an endorsement shown as “Personal Property Replacement Cost”, sometimes listed on the Declarations  as form HO 4 90, that in return for an additional amount of premium paid, insures your personal property at replacement cost value.

Replacement cost (RCV) is often defined as the cost to replace insured property today with property of like kind and quality without deduction for depreciation. In contrast, actual cash value (ACV) is generally defined as the cost to repair or replace the damaged property with materials of like kind and quality, less depreciation of the damaged property. Courts have differed as to whether depreciation includes economic obsolescence as well as actual physical depreciation.

But what does all this actually mean to the homeowner looking to recover from losses to his home? The policy typically states, “we will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation, but not more than the least of the following amounts:

(1)   The limit of liability under this policy that applies to the building ;

(2)   The replacement cost of that part of the building damaged with material of like kind and quality and for like use; or

(3)   The necessary amount actually spent to repair or replace the damaged building.

The policy further states, “You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to buildings on an actual cash value basis. You may then make claim for any additional liability according to the provisions of this Condition C. Loss Settlement, provided you notify us of your intent to do so within 180 days after the date of loss.

Many homeowners have difficulty in understanding the practical effect of these provisions on their recovery. What the policy is saying is that in order to recover the replacement cost (RCV) the homeowner must actually replace the damaged property with material of like kind and quality and document the amount actually spent. Until the repairs or replacement have been made and the expense documented, the homeowner is only paid the depreciated amount known as the actual cash value (ACV). In most cases this is a two step process. The homeowner is first paid the depreciated amount (ACV) and then may make claim for the full replacement cost (RCV) after they have made repairs or replacement of the damaged property.

While many homeowners are aware that they have replacement cost coverage for their homes and property, few truly understand that payment of full replacement cost is contingent upon the actual replacement of their damaged property and documenting the costs incurred.

How much should I insure my home for?

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One of the most frequently asked questions that insurance agents and adjusters are asked is; how much should I insure my home for? There is no exact answer to this question, except that the amount of insurance in force should be at least eighty percent (80%) of the replacement cost value of the property. In residential insurance policies, failure to insure to eighty percent of the replacement cost value results in a penalty. That penalty could change the loss settlement from a “replacement cost” basis to an “actual cash value” settlement. Actual cash value is generally defined as the replacement cost less depreciation, with certain exceptions such as New Jersey, where the precedent dictates the use of the Broad Evidence Rule for determination of actual cash value. As a rule of thumb, replacement cost less depreciation is the norm. As an example, assume that the replacement cost loss is $50,000.00 and the depreciation is 10%, or $5,000.00. The resultant actual cash value would be $45,000.00 ($50,000.00 – $5,000.00 = $45,000.00). If you did not carry insurance of at least 80% of the total replacement cost of the dwelling, in this example, you would be paid only the actual cash value of the loss ($45,000.00) not the replacement cost loss of $50,000.

So how do you determine the replacement cost value of your home? A common method is to multiply the total square footage of available living space in your home times a factor which represents today’s cost to construct a “like kind and quality” home, normally expressed in dollars per square foot ($/sq. ft.).

Industry guides are available to estimate the replacement cost value in dollars per square foot, such as RS Means Square Foot Costs. These guides detail square foot replacement costs for different types of residential dwellings such as one story ranch homes, bi-level, two story, and three story homes. As an example, a 1-1/2 story, wood frame home with wood siding totaling 2,000 square feet would cost on average $92.75/sq. ft. to build according to RS Means 2011 edition. This base cost is then modified to add for items such as a finished basement ($20.70/sq. ft.) or upgraded kitchen cabinets and solid surface countertops ($ + 3528). The point is that this is an estimate, not an exact science, and you should be guided accordingly.

Most professional insurance agents are willing to help you determine the replacement cost value of your home and help you purchase the correct amount of insurance to comply with the policy guidelines. Be sure to prepare for the discussion with your agent by knowing the correct square footage of your home and the unique construction details such as upgraded kitchen cabinets, moldings or bath and kitchen appliances. Don’t forget to include attached garage space and attached decks in your discussion. You can determine the total square footage of available living area in some cases by referring to your tax assessment. If in doubt, measure the perimeter of the structure and multiply that amount by the number of stories it has.

As previously stated, this is an estimate which should only be used as a guide to help you comply with the insurance policy terms and conditions. If unsure about the correct value, it is better to overestimate, rather than underestimate, the replacement value to avoid potential penalties after you have suffered a loss to your home.

Hurricane Irene – Second NFIP Extension of Deadline for Filing Proofs of Loss

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FEMA has once again extended the deadline to submit proofs of loss for all claims for damage arising out of Hurricane Irene to NFIP insured buildings.

The Standard Flood Insurance Policy (SFIP) issued under the National Flood Insurance Program (NFIP) provides a period of sixty (60) days from the date of loss within which the policyholder must send the insurer a complete, signed, and sworn proof of loss, which is in effect the policyholder’s detailed statement of the claim.

Due to infrastructure damage and high water caused by Hurricane Irene, access to NFIP-insured buildings was not possible in many instances, which delayed the claims process for many policyholders. As a result, on September 24, 2011, FEMA provided a limited waiver of the time frame within which to file the proof of loss provision and authorized an additional 30-day extension of the SFIP 60-day deadline for sending a signed and sworn-to-proof of loss to the insurer.

Because NFIP policyholders have continued to encounter difficulties filing timely proofs of loss as a result of the unusual conditions occurring after Hurricane Irene, FEMA decided to provide a second limited waiver on November 22, 2011, and authorized an additional 60-day extension of the time period within which a policyholder must file a compliant proof of loss.

Under the SFIP, the NFIP policyholder who incurred a flood loss on August 26, 2011, was required to send the proof of loss to the insurer by October 25, 2011. With this second limited waiver and extension, the same policyholder now has until January 23, 2012, to send the proof of loss.

This extension shall apply to all claims for flood damage arising out of Hurricane Irene to NFIP-insured buildings and their insured contents in the states of Connecticut, Delaware, Washington DC, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Vermont, and Virginia.

http://www.nfipiservice.com/stakeholder/pdf/bulletin/w-11120.pdf

Homeowners Insurance – A Promise to Pay

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A homeowners insurance policy is nothing more than a contract, an often misunderstood agreement from a consumer’s perspective that is difficult to read and subject to many years of interpretation by the courts.

It is sometimes described as a “contract of adhesion”, meaning that the insured (buyer) has little or no say regarding the language describing the terms and conditions of the insuring agreement as written by the insurer (seller). The insured simply “adheres” to the terms of the contract when purchased. Accordingly, because the insured had no input into writing the terms of the contract, any ambiguity in the meaning of the contract is always sided in favor of the insured.

What the contract of insurance (policy) says, in effect, is that in return for payment of a premium by the insured, the insurer warrants to pay for losses incurred caused by insured perils. In other words an insurance policy is simply “promise to pay”. This is based upon the ‘”principle of indemnity”, the basic premise being that the insured should be made whole or “ indemnified” for his loss due to a covered peril. Being made “whole” means that the policyholder should be placed back to the conditions he enjoyed prior to the loss. The insured should not profit from the loss but neither should he suffer a lesser position than he maintained prior to the loss.

Insurance has been described as a “matter of public trust” that imbues the insurance company with a special duty to insure that policyholders are treated fairly and in good faith. Truly, the policy can be characterized as a simple “ promise to pay”.

It’s All in the Details

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Whether you are a homeowner or an experienced claims professional, keeping detailed logs of telephone conversations, e-mails and general correspondence is a must. When we accept the reality that we live in a litigious society, the need to document our dealings with others becomes self-evident.

The process of insurance claims adjustment has become a protracted process that no longer seems to rely on the premise of “good faith and fair dealing”. With the advent of the McKinsey & Company management style and its inherent reliance on the concept of short term profitability, the promise of indemnity has become a tenuous balance between profits and serving the insuring public fairly.

Accordingly, policyholders must protect themselves proactively, whether they utilize the services of a professional claims preparer, or not, by keeping detailed logs of all telephone conversations with insurance company adjusters and representatives. A simple notation in a spiral notebook will suffice every time you have a conversation or a meeting with the insurance company representative. The notation should include the date and time of the contact, the representative’s name and title and a brief description of the issues discussed, especially any promises made or deadlines discussed.

All written correspondence should be saved and filed for future reference. E-mails should be printed out and maintained along with any regular mail or certified mailings. Before speaking with a claims adjuster, it is always helpful to write out a simple list of questions that you may have or issues you wish to discuss. It is easy to forget what it is that you need to discuss when you are in the middle of what can easily be a contentious debate over coverage or values. Your pre-discussion questions can also serve as a record of the conversation with the insurance carrier’s representative and a reminder of future actions to be taken by both you and the adjuster. What you document now may be the difference between winning and losing potential future litigation should you disagree with your insurer.

Hurricane Irene – NFIP Extension of Deadline for Filing Proofs of Loss

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The Standard Flood Insurance Policy issued under the National Flood Insurance Program (NFIP) provides a period of sixty (60) days from the date of loss within which the policyholder must send the insurer a complete, signed, and sworn proof of loss, which is in effect the policyholder’s detailed statement of the claim.

As a result of the catastrophic losses incurred as a result of Hurricane Irene and tropical storm Lee, policyholders who sustained damage to NFIP-insured buildings have been delayed in the claims process due to high waters and lack of access to insured properties. For those reasons, an extension of the 60 day period within which the policyholder must send a proof of loss has been granted.

An extension of an additional thirty (30) days has been granted to all claims for damage arising out of Hurricane Irene for NFIP insured buildings in the states of Georgia, South Carolina, North Carolina, Virginia, Washington, D.C., Maryland, Delaware, Pennsylvania, New Jersey, New York, Connecticut, Massachusetts, Rhode Island, New Hampshire, Vermont, and Maine by flooding starting between August 26, 2011, to September 4, 2011. For example, a policyholder who incurred a flood loss on August 26, 2011, would normally have until October, 25 2011, to submit the requisite proof of loss. With the extended deadline, the same policyholder now has until November 24, 2011 to submit the proof of loss.

This deadline may be extended in the future subject to the determination of FEMA whether or not a further extension is warranted.

http://www.nfipiservice.com/stakeholder/pdf/bulletin/w-11082.pdf