How is the settlement amount determined?
The settlement amount depends on which type of policy you have.
Having inadequate insurance can affect the amount of compensation
you get.
- Replacement Cost and Actual Cash Value
Replacement cost provides you with the dollar amount needed to
replace a damaged item with one of similar kind and quality without
deducting for depreciation -– the decrease in value due to age,
obsolescence, wear and tear and other factors. An actual cash
value policy pays you the amount needed to replace the item minus
depreciation.
Suppose, for example, a tree fell through the roof onto your eight-year-old
washing machine. If you had a replacement cost policy for the
contents of your home, the insurance company would pay to replace
the old machine with a new one. If you had an actual cash value
policy, the company would pay only a percentage of the cost of
a new washing machine because a machine that has been used for
eight years would be worth less than its original cost.
Suppose, also, that the tree damaged your 15-year-old roof so
badly that it had to be completely replaced. If you had a replacement
cost policy, the insurance company would pay the full cost of
installing a new roof. If you had an actual cash value policy,
it would pay a smaller percentage of the cost of replacing it.
- Extended and Guaranteed Replacement Cost
If your home is damaged beyond repair, a typical homeowners policy
will pay to replace it up to the limits of the policy. When the
value of your insurance policy has kept up with increases in local
building costs, a similar dwelling can generally be rebuilt for
an amount that is within the policy limits.
Some insurance companies offer a replacement cost policy that
will pay a certain percentage over the limit to rebuild your home
-- 20% or more, depending on the insurer -- so that if building
costs go up unexpectedly, you will have extra funds to cover the
bill. These are called extended replacement cost policies. A few
insurance companies still offer a guaranteed replacement cost
policy that pays whatever it costs to rebuild your home as it
was before the disaster. But neither a guaranteed or extended
replacement cost policy will pay for a house that's better than
the one that was destroyed.
- Mobile Home Policies
If you own a mobile home, you may have a policy based on replacement
cost, actual cash value or, in a few cases, a "stated amount."
With a stated amount policy, the maximum amount you receive if
your home is destroyed is the amount you agreed to when the policy
was issued. The depreciation in the value of your home is not
considered in the settlement. If you opt for the stated amount,
update your policy annually to make sure that the stated amount
will cover the realistic cost of replacing your mobile home. Check
with local mobile home dealers to find out what similar homes
sell for now.
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Information Institute, Inc. - ALL RIGHTS RESERVED -
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