Look to replacement value, not property value for home coverage

When your property value increases, should you increase your homeowner’s insurance?

Good question.

As the value of your home goes up, yes, you should think about increasing your homeowner’s coverage, says Annmarie Camp of Chubb Personal Risk Services in Whitehouse Station, New Jersey. “But the biggest mistake homeowners make is basing this decision on an increased market value, instead of on a home’s ‘replacement cost’ value.”

A better question: “Can I rebuild my house today at the value listed on my policy?” says Celia Santana, CEO of Personal Risk Management Solutions in Manhattan.

To confirm you’re adequately insured, consider having an appraisal conducted by your insurance carrier; many perform the service for free. The appraiser will determine the replacement value, which is what your policy actually covers.

“Your home should be insured at 100 percent of replacement value,” says Mildred Ayala of HUB International Northeast in Woodbury.

Many policies also include an inflation guard endorsement, that increases the dwelling limits by 1 to 3 percent per year, says Mahmoud Arjomand, president of Polaris Risk Management in Manhattan. Your premium will go up as your limits are automatically increased.

But some carriers only pay “actual cash value” — replacement cost minus depreciation, Arjomand says.

Say your 15-year-old wood floors are damaged, and it will cost $10,000 to replace them. A replacement value policy will pay $10,000 (minus any deductible). The ACV policy may claim that since the floors are 15 years old, and have a life of 30 years, they have depreciated by 50 percent, and therefore the carrier will pay only $5,000.

The moral, Arjomand says: “The least expensive policy doesn’t always provide the best value.”