What happens if your home dwelling coverage is less than the replacement cost of your home?
Let’s say your home’s dwelling coverage is $350,000, but your replacement cost is $450,000 (we’ll use these numbers in the theoretical examples used in this post). If your home is completely destroyed from a covered loss, you will most likely only get $350,000 to rebuild your home. Imagine paying for $450,000 for a home, paying for insurance, but then your home is destroyed and the house rebuilt is 22% less than the size of the home you initially bought? Most people think this is the only negative way having less dwelling coverage than needed can affect them, but that’s not the case. Let’s say your house wasn’t a total loss, but a covered claim, for example hail, destroyed your roof. It’s going to cost $20,000 to repair. If you don’t have the current dwelling coverage where your home is insured at the full replacement cost, you will be responsible for a bigger chunk of the repairs in addition to your deductible. Using the amounts above, your insurance company will only pay about 78% of the damages because your dwelling coverage is only about 78% of your replacement cost, so in this example you’d be responsible for $4,400 plus the deductible. Your insurance company will obtain proof of the cost. If you don’t repair the damages, they can cancel/nonrenew your policy and it’s near impossible to get a standard home insurance policy if repairs are needed on a home.
I offer a free insurance audit (you do not have to be a client!) on Georgia home and auto insurance policies. This audit includes a detailed replacement cost estimator (RCE) and I send you a copy of the detailed report. Most carriers use the MSB RCE and this how they determine the dwelling coverage. RCE is not based on market value or purchase price. If your home burns down, the new home is built on the same property, you don’t have to rebuy the land. RCE is simply the cost to rebuild your home should it be a complete loss. When getting a new home insurance policy, your agent is suppose to do a RCE to determine the most accurate estimate for the dwelling coverage amount. Agents will often times just use your current dwelling coverage to save time, but I like to make sure my quotes and policies are as accurate as possible. It’s good to show an apples to apples quote so clients can easily compare rates, but the recommended dwelling coverage should be noted to the client and the policy written for that amount.
Some unethical agents will actually use a lower dwelling coverage amount than the RCE to make their rate cheaper so that they get your business. This is referred to as “low balling” because the carrier’s underwriter will review a home insurance policy after it’s written. Over the past few years, they’ve become very strict about the accuracy of the dwelling coverage at binding and many will do a RCE to make sure the agent wrote the policy for the correct amount. If it’s too low, the client or the mortgage company will be sent a notice with a bill for the increase in premium and the dwelling coverage will be increased. Since most home insurance policies are billed to a mortgage company, those unethical agents hope the client won’t notice the increase or of they do, that they won’t want to deal with switching carriers again in such a short time. I do not like my clients to get surprise bills so it’s important to me that my RCE estimates are as accurate as possible. Mistakes do happen, but you can always request a copy of the RCE report from your agent and let them know if there are any discrepancies.
Your RCE should be updated at least every few years to make sure your dwelling coverage is still accurate. The cost to rebuild homes changes year to year. Clients do updates and/or additions that can affect their RCE and forget to notify their agent/carrier. Most carriers automatically increase the dwelling coverage on a policy each year at renewal, but you don’t want to count on that as an accurate dwelling coverage. There is a very important endorsement, usually referred to as “increased replacement cost.” It’s based on a percentage of your dwelling coverage, most often with options of 25%, 50%, or 100%. This endorsement should be included on every home insurance policy with a minimum of 25%! That way in case their is a mistake or inflation and your dwelling coverage is not high enough, it offers a cushion. It’s not intended to be used as a replacement though for dwelling coverage being intentionally to low. Your mortgage company and carrier will still require your dwelling coverage be insured at replacement cost.
Here are other articles on the subject: