Many people think property insurance is cut and dry. Whether it is building coverage, contents, business, personal or any type of property, you should be aware of the following things.
Property is one of the most misunderstood in regard to “value”. What is “value” and how is it determined? The Merriam-Webster Dictionary has many definitions. Here are a few:
- a fair return or equivalent in goods, services, or money for something exchanged
- the monetary worth of something: MARKET PRICE
- relative worth, utility, or importance (a good value at the price) (the value of base stealing in baseball) (had nothing of value to say)
The misconception about “value” in the insurance world is this. Let’s take insurance on a home. The “market price” might be $150,000; meaning you would list the house for sale in real-world terms for $150,000. So the big question insured’s have is “why do I have to insure it for $265,000?”
It has to do with Replacement Cost and Coinsurance.
Replacement cost is just that, what it will take to replace it with the same or equal value. If the house is insured for the real estate value of $350,000 and it takes $568,000 to rebuild it to like kind, you are underinsured. What does coinsurance have to do with this? Coinsurance is the percentage of the property value that it must be insured for. An easy example can be a property with a Replacement Cost value of $100,000 is required by the insurer to have a minimum coinsurance factor of 80%, meaning it must be insured for at least $80,000. Anything less will result in a reduced settlement in a claim.
One more important valuation is ACV or Actual Cash Value. Whereas Replacement Cost is full restitution, Actual Cash Value is Replacement Cost minus depreciation. Understand these provisions before you insure.
Some other terms you must be aware of when insuring property are:
Special Form, All Risk, Named Peril, Exclusions, Deductibles, Special Deductibles, Written Flat, Form Differences, the list goes on.
Yes, insuring property can get complicated.