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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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Homeowners insurance warning

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email

Q: In a homeowners policy, with a replacement cost estimated at $100,000, I have $60,000 of insurance with a co-insurance requirement of 80% and my deductible is $250. I sustained roof damage that is estimated at $10,000. How much does the insurance pay?

A: Your question primarily focuses on the issue that the home is considered "under-insured" in that the amount of the insurance is significantly less than the replacement cost of the home. In this case, the insurance benefit for any claim is reduced proportionately based on the ratio of underinsurance and the benefit paid may be based on depreciated value of the roof rather than its full replacement cost. The easiest way to understand this concept is to first calculate the benefit that would be payable if the house were fully insured and then calculate the reduced benefit due to the under-insurance factor. Assume that the policy was $100,000 (actually any insurance amount over $80,000 would be considered full coverage in this case). Then the insurance benefit would simply be $10,000 loss minus $250 deductible = $9,750 net loss, minus the 20% co-insurance of $1,950, leaving a insurance payable of $7,800. Now factor in the in the fact that the insurance was only 60% of the replacement value of the home. This reduces the claim amount to 60% of the replacement cost = $6,000 (less depreciation of the roof, if applicable) and the $250 deductible and $1,100 co-insurance are subtracted from that amount. So even if the roof were brand new at the time of the loss, the maximum insurance benefit would be $4,650. This cuts the protection dramatically. The morale of the story here is that if you want replacement cost insurance for your home, it is important to keep the insurance up to pace with the replacement cost of the home. There is a small cushion for miscalculation error and inflation; insurers usually require that the insurance amount be at least 80% of the replacement cost. After home prices and building costs have risen so sharply for so many years, this creates a major risk for homeowners who are not aware of the issue.


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