Your Home's Replacement Value and Your Home Insurance Policy

Mary Rand Home Insurance Editor

Reality Check: Did you buy your house at the height of the housing bubble between 2005 and 2007? Have you seen your home's value decrease, and have you adjusted your home insurance coverage accordingly? Tell me what you think on our Facebook page!

Will your home insurance policy replace your house should you ever have a claim on your entire structure? This depends on whether your policy is a replacement cost value policy or an actual cash value policy. If your policy is an actual cash value policy, it will not. In California for example, courts have ruled that your home's actual cash value, unless otherwise specified in the insurance contract, is the fair market value.

Fair market value can be loosely defined as the amount that a knowledgeable, willing buyer would pay and that a knowledgeable, willing seller would take for an item, neither being under unusual pressure to buy or sell.

Do you know if your home insurance policy will replace your house should you ever have a claim on your entire structure? This depends on whether your policy is a replacement cost value policy or an actual cash value policy.

Insurance companies are allowed to provide an alternate definition of actual cash value in the policy if another method of determining value is to be used.

Take a look: If you have a replacement cost policy, the chances that you will be able to completely rebuild your home are better; nevertheless, there are a myriad of replacement cost policies, so you need to be careful to purchase a replacement cost policy that best meets your needs. A homeowners insurance policy cannot be sold as a "guaranteed replacement cost" policy unless it will pay to completely rebuild the home.

Other types of replacement cost policies will pay your policy limits, plus a certain percentage above those limits. Some policies do not have building code upgrade (ordinance or law) coverage. Cities and counties periodically change their building codes. Unless your policy has this coverage, your insurance company may not pay for changes you may need to make to the structure of your home to bring it up to current building codes.

As discussed earlier your agent, broker, or insurer can assist you in establishing a limit that is adequate to rebuild your home. It is important to update that limit periodically to maintain a limit that reflects current construction costs. You may want to ask your agent, broker, or insurer if they automatically review or increase limits on a regular basis or if they offer an automatic inflation guard option that increases limits according to current inflation information.

In short, there is no substitute for reading your policy and your renewal declarations carefully. Whenever you are unclear about your policy, you need to contact your agent, broker, or company for clarification in writing. Discovering after a loss that you did not have the right coverage is not a situation you want to experience.

Remember, if you only shop by comparing prices only and not by comparing coverage, you are doing yourself a disservice. Your home is one of the most important purchases you will make. Take the time to get the facts straight before you purchase homeowners insurance. It may be one of the best decisions you make for yourself and your family.

Important terms from this homeowners insurance article: replacement value, replacement cost, home insurance, homeowners insurance, replacement cost value policy, actual cash value policy

More about home replacement values: Construction Costs, Window Replacement Costs