Once you have decided on the proper homeowners policy, the next step is to figure out how much coverage is really needed on your home.
This amount should be based on replacement value -- what it would cost to rebuild the structure. The purchase price is not always a good guide -- even if you bought the house recently -- because part of that price was for the land.
Your insurance representative can help you in determining the replacement cost by using an insurance company's guidelines, and taking such factors as type of construction, square footage and location into consideration.
Since most losses are not total, you may not need insurance for 100 percent of the replacement cost of your home. (But only 100 percent coverage will provide 100 percent replacement in the case of total loss.)
You are not fully protected for even a partial loss, though, unless your coverage is at least 80 percent of replacement cost. When you fall under 80 percent -- because construction costs have risen, for instance -- another less generous formula applies.
In such cases, the insured with losses over $1,000 or 5 percent of the amount of insurance will receive the greater of either actual cash value (replacement cost minus depreciation) or an amount determined by the following formula: amount of insurance carried divided by 80 percent of full replacement value multiplied by the replacement cost of loss equals payment.
For example, a living room is destroyed in a fire and will cost $12,000 to replace. If the homeowner has $80,000 replacement cost coverage on your $100,000 home, or 80 percent of full coverage, he will be reimbursed in full.
If he has only $60,000 worth of coverage on that $100,000 home, he might get only $9,000 -- $60,000 divided by $80,000 multiplied by $12,000 equals $9,000 -- not the full $12,000.
An option you may want to consider is the guaranteed replacement cost endorsement. With this endorsement, you agree to insure the dwelling to 100 percent of its full replacement cost, and maintain coverage on the dwelling at 100 percent of its full replacement cost.
The company then agrees that it will replace the structure, even if it costs $115,000 to rebuild a house insured for $100,000. Depending on the company you are with, the cost of this endorsement can be as little as $1.
With certain companies, another benefit of insuring to full replacement cost is that by doing so you may qualify for a preferred rate, so in some cases the cost of insuring to 100 percent of full replacement cost may be less than insuring to only 80 percent.
There is a large segment of homeowners for whom the 80 percent of replacement cost clause represents another dilemma. Those home owners, who own substantial and often ornately detailed structures put up before the 1950's, often have a "replacement cost" far in excess of what the owners might spend to replace the dwelling using modern materials and simpler construction techniques.
For these homeowners, the cost to replace the dwelling could well be several multiples beyond its market value. In such cases an owner may elect to insure the dwelling for its actual cash value, keeping in mind that all losses (even partial ones) will be paid on an actual cash value basis.
Choosing the proper amount of coverage can vary greatly from homeowner to homeowner because many individual factors have to be considered. Consult with a professional insurance representative for further information and advice concerning your particular needs.
Allen Grell is a licensed insurance broker with the Potter, Harris & Scherrer Agency in Williamsville, New York.