New caps muddy picture for homeowner’s insurance

If you have recently made a major addition or renovation to your home, you may want to take a moment and review your homeowner’s insurance. The reason? Many of the largest home insurers (including State Farm and Allstate) are now placing caps on their replacement policies.

Heretofore, most insurance companies offered homeowners a full replacement cost guarantee which basically agreed to pay the entire cost of rebuilding a destroyed home even if the cost exceeded the face value of the policy. Unfortunately for consumers, the times are changing.

Insurance companies now claim that the replacement guarantee encouraged people to intentionally or unintentionally under-insure their homes, or at the least, fail to increase their coverage in the event of a major renovation or addition. They also are discovering that the cost of rebuilding a home located in a major subdivision can be far higher than what the original builder incurred because of the greater economy of scale enjoyed in the original project.

Most of the larger insurers are now capping their replacement cost payouts at 120 percent to 125 percent of the face value of the policy. Even if your agent is at fault for underestimating the replacement cost of your property, you could be the one who loses in the event of a catastrophe.

There is some concern that agents will now be more likely to overestimate your property value in order to protect themselves from potential liability. Only time will tell on this matter.

If you have a concern that your home may be over- or undervalued on your homeowner’s policy, we would suggest calling your agent for an in-home review or talking with local contractors who have built homes in your area recently. Some contractors will even examine your home and give you an estimate on rebuilding for a nominal fee.

No one enjoys thinking about the devastating effects of a fire in their home, but the insurance companies are making the imponderable something you should indeed ponder very soon.

Sean Sullivan is a shareholder/director at Nathan Wechsler & Company, Concord and Laconia.

Categories: News