Increased Costs and Rebuilding After Disaster: Do You Have Enough Coverage?
People rely on homeowners insurance or personal articles insurance to cover a variety of scenarios--fire, robbery, tornado, etc. If your home or personal belongings are damaged as a result of a covered loss, your insurance may help with the cost of replacing these items. The cost of building materials has gone up significantly, as has the cost of other personal belongings, which means your coverage might not go as far as you think. That's why it's a good idea to review the types of coverage available to you--actual cash value, market value, restoration cost and increased reconstruction cost.
Rebuilding Your Home
Before your home is damaged due to storms, a fire or another covered event, there are two types of coverage you may want to ask your agent about in case you need to rebuild--restoration cost and increased reconstruction cost.
Restoration cost is the amount of money it costs to restore the form and function of the damaged part of covered property. There are limitations and restrictions so you will have to consult your policy for details.
Increased Reconstruction Cost
Increased Reconstruction Cost coverage is similar to replacement cost coverage for your personal belongings. This coverage could give you up to 150% of the dwelling limit (stated in your policy) to help rebuild your home in the same fashion it was before being damaged. This helps make sure today's increasing construction and materials costs do not limit the quality of your rebuild. This is a great option if you are concerned about inflation and the higher cost of construction materials.
Replacing Your Personal Belongings
Replacing your personal belongings after a covered disaster is slightly different. The amount you receive from your insurance company to replace your items is determined by using actual cash value, market value or restoration cost.
Actual Cash Value
Actual cash value and market value are similar, but there are some key differences in how they are determined. Actual cash value usually refers to the restoration cost of the damaged item less depreciation. Market value means the price the damaged item was worth in the market immediately before the loss occurred.
When personal belongings are damaged in a covered loss, most insurance companies consider the age and condition of the damaged item when determining its actual cash value or market value. For example, if your TV was stolen and it was two years old, your insurance company would calculate the payment to you for a 2-year-old TV of the same size, make and model, not what it would cost to buy the TV brand new. (We'll explain more about that later.) Because the actual cash value or market value is usually less than the amount it takes to replace it with a brand new model, you would have to make up the difference, which is why it's a good idea to buy restoration cost coverage.
Restoration Cost of Personal Belongings
Above we explained that actual cash value or market value of an item is typically not enough money to replace your stolen 2-year-old TV with a brand new one. Although the premium may be slightly higher, restoration cost coverage can get you much closer to a brand new TV of the same size, make and model as the one that was stolen or damaged. It’s always a good idea to keep an inventory of your high-value personal belongings, and receipts for those items as well.
It's a good idea to talk to your agent about these different types of coverage. When it comes to insurance coverage, hindsight is 20/20, so it's better to do it now, before it's too late.