We “Mind” the Home Protection Gap with Guaranteed Replacement Cost Coverage

Time and again homeowners are shocked to learn that, after a devastating loss, they are not carrying enough insurance to rebuild their homes. This was underscored in recent years on the heels of major hurricane damage to homes and in the aftermath of the California wildfires last year in which two-thirds of the victims were found to have insufficient coverage to rebuild their burned-to-the-ground homes. In fact, in a study, “Minding the Protection Gap,” by the Connecticut Insurance Law Journal, the prevalence of under-insurance among American homeowners is estimated to be close to 80 percent.  

Many homeowners mistakenly think they have enough insurance in the event of a catastrophe, believing the property coverage amount they purchased will pay for the costs of rebuilding. In some cases, homeowners might have purchased only enough insurance to cover the amount of their mortgage. But the mortgage may be, at most, 80 or 90 percent of the value of the house, depending on the original down payment (and even less, if the home has appreciated in value). Others insure for an amount equal to the current value of their homes, but this may be not nearly enough to rebuild the house, including accounting for labor costs and supplies. In addition, in many cases insurance brokers will use a software tool to determine how much coverage should be purchased. These tools determine the cost of rebuilding a home based on data that includes local labor rates, materials prices, storage costs and many other line items. But software tools can’t predict everything that goes into rebuilding, such as with the California wildfires that wiped out an entire neighborhood or dozens of homes in specific areas, causing construction costs to rise because the price of building materials and construction workers increased due to widespread demand. This price increase, according to the Insurance Information Institute (III), may push rebuilding costs beyond the homeowner’s policy limits and leave an insured with a coverage gap.

At Owens Group, we take steps to help ensure that our clients are adequately covered to rebuild their homes in the event of a catastrophic loss. We partner with insurance carriers that provide Guaranteed Replacement Cost coverage as part of a Homeowners policy. With this type of policy, an insurer will pay for the full cost of replacing the home even if this amount exceeds the policy limits. This valuation method fully indemnifies an insured without any depreciation and without a maximum reconstruction payment. It will cover supplies, materials and labor for rebuilding the home to the same specifications as it was originally built. The cost to purchase this type of policy raises the premium of Homeowners insurance, but it is well worth the peace of mind it provides should a catastrophic loss occur.

Another important factor in helping our clients properly insure their properties is determining whether coverage will step in to rebuild a home up to code. Building codes are updated from time to time and may have changed substantially since a home was built. In the event of damage, a homeowner may be required to rebuild his/her home to the new codes. Standard homeowners insurance policies generally won’t pay for that extra expense. For proper coverage, an endorsement to the policy called Ordinance or Law is required, which will pay a specified amount toward bringing a house up to code during a covered repair.

Talk to us about your Homeowners policy and making sure you have the coverage you need in the event of a disaster. Please contact Michelle Clark at 201-408-3510, or Victoria Cioce at 201-408-3509.