If purchasing homeowners insurance isn’t stressful enough, consumers add to their stress by assuming how insurance works and not asking questions when calculating their home’s replacement value. My agency consistently witnesses those who want to insure their home’s replacement for much less than what it would take to replace their home today. When asked why, they say they are going to build smaller if they lose their home and don’t need as much insurance. If you are one of these consumers, stop! This is not how insurance works.
I’ve found that most respond well when taught the original intent of their insurance policy. The first thing you have to do is to stop picturing a total loss scenario. I realize government and news reports typically show the catastrophic losses when reporting on insurance but believe it or not, most insurance claims are partial losses. That is, any loss that’s less than the total amount of your home. From smoke damage from a small kitchen fire to a pipe break in the bathroom, the claim could be substantial to any of us but not a total loss.
Let’s take Joe Public. He’s the fella that scares his wife when he gets around power tools. He’s also one of those that survives on a daily rationing of assumptions, and insured his home “his way.” One day Joe Public gets angry after reading letters to the editor and decides to relieve his stress by cutting down the dead tree next to his home. While not paying attention to his work, the tree falls and hits Joe’s roof and half of it has to be replaced. Your insurance carrier doesn’t come in and replace half of your roof with a smaller one meant for your “well intended” futuristic home. They replace it with the roof type, size and value of what you have at the time of the loss. Joe’s day is about to get worse when he finds out his homeowners carrier is going to pay him significantly less than what he needs to replace half of his roof. Joe didn’t realize his policy has a provision that requires a limit adequate to replace his entire home as it is today and if he doesn’t, his partial claim payment would be seriously reduced.
Most consumers that try to insure their home in this fashion will admit that this is their means of saving on premium dollars today and don’t know their policy could penalize them if their home is underinsured.
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Your policy was designed to give you back what you have now and doesn’t assume you are going to build smaller.
From a partial claim to a total loss, now you can better understand how and why the premium is driven by the limit. The carriers protect themselves so protect yourself as well by asking questions.