When was the last time you looked at your homeowner’s insurance policy? If you haven’t checked it in a while, it may be wise to do so. That’s because inflation is rapidly increasing building costs. If your house is damaged or destroyed, having inadequate coverage might result in a significant loss.
For example, if your dwelling is insured for $300,000 but the cost of rebuilding your home is $375,000, you would have to make up the difference in the event of a total loss.
To get around this issue, most insurance companies now offer something called “replacement cost guarantee,” although different carriers may use different terminology. That provision covers the entire cost to repair or replace your home, even if the amount exceeds your coverage.
Sometimes called "RCV," the replacement cost value is what would be required to replace your damaged or destroyed home with the exact same or similar home in today's market.
“This is generally the most recommended option, since it gets homeowners closest to their living situation before a covered peril occurred,” ValuePenguin advises.
Inflation guard endorsement
P.J. Miller, a partner with Ohio-based Wallace & Turner Insurance, says the forerunner of the current day “guaranteed replacement cost” was the “inflation guard endorsement.” While it’s not known if all carriers provided this option, he says most did and for various reasons.
“An example would be the simple fact that you don’t have to remember to contact your carrier to increase coverage and the peace of mind knowing that it’s done automatically,” Miller told ConsumerAffairs.
But Miller says it’s important to understand how your policy’s inflation adjustment works. Some policies might increase the coverage only for the policy term and then reset it to the prior term’s coverage amount.
“Typically, this form would offer an increase of a small amount, maybe 2% per quarter, so by the end of the policy term you could potentially have 8% more coverage than you started with on that policy term,” Miller said. “Some carriers include this coverage, others charge a very nominal premium, $10, for example.”
Miller says the recent California wildfires exposed gaps in many homeowners’ insurance coverage.
Replacement costs are rising
Bill Martin, president and CEO of Plymouth Rock Home Assurance Corporation, says homeowners should be prepared for much higher repair costs when they make a claim. In short, he says it will probably cost more to provide adequate insurance coverage.
“Most insurers will offer an option to buy extra coverage for the current cost to repair your home,” Martin told ConsumerAffairs. “The amount of insurance coverage available to repair or replace a house is tied to the dollar amount it would take to rebuild, not market value.”
Martin’s advice is to check with your insurance agent or insurer to see if you can afford to buy the extra coverage for what a replacement will cost as opposed to its insured or actual depreciated value, which is included in most base policies. In the event of a major claim, the extra cost will be worth it.
“I recommend you boost your coverage, especially ‘Coverage A,’ which is the part of a homeowners policy that may help to rebuild or repair the physical structure of your home if it’s damaged by a covered hazard,” Martin said. “The majority of damage doesn’t destroy your entire house, which makes it relatively inexpensive to increase your coverage in the event of needing to replace the whole house and its contents.”