The best kind of homeowners insurance is the kind you never have to use. However, if you do have to file a homeowner’s insurance claim to restore your home, it pays to understand your policy. When working through insurance to repair your home after damage, there are several important parts of your policy that you should review to ensure you can properly advocate for your needs and restore your home to pre-loss condition.
Our team at Lamont Bros. Design & Construction has worked with many Portland area homeowners and their insurance companies to repair their homes. Throughout this process, we’ve witnessed how homeowners who know the ins and outs of their policy’s terms often have a much easier time navigating the restoration process.
In this article, you can read about the 6 most important things you should understand about your homeowner’s insurance policy. We’ll discuss what information you should review before beginning a restoration to make sure you fully understand your rights and responsibilities under the policy. The specific topics we will cover include:
- Actual Cash Value vs. Replacement Cost Value
- Policy Limits
- Structure B Coverage
- Code Upgrade Exclusions
- Relocation Coverage
- Policy Timelines
Actual Cash Value vs. Replacement Cost Value
When navigating the complexities of a homeowner’s insurance policy, one of the key elements to understand is the difference between Actual Cash Value (ACV) and Replacement Cost Value (RCV). These terms dictate the basis on which your insurance will calculate payouts for lost or damaged property.
Definition and Differences
Actual Cash Value: This is calculated as the replacement cost of your property minus depreciation. Depreciation accounts for wear, tear, and age, meaning the ACV might be significantly less than what you originally paid or what it would cost to buy new today. Essentially, ACV compensates you for the item’s actual value at the time of loss.
Replacement Cost Value: This covers the full cost to replace the damaged or lost item with a new one of similar kind and quality, without deduction for depreciation. A policy that covers RCV means you’re more likely to be fully compensated for replacements, which is particularly beneficial for major repairs or total losses.
Impact on Insurance Claims
The difference between ACV and RCV affects the reimbursement you’ll receive from your insurance. With ACV, the payout will likely not fully cover the cost of new replacements due to depreciation deductions. In contrast, RCV aims to cover the complete cost of acquiring new items, although it might come with higher insurance premiums.
In cases involving home repairs, insurance typically calculates the initial payout based on ACV, even if your policy is written to cover replacement costs. Should you proceed with the actual replacement or repairs, the policy may then cover the additional costs of replacement.
In other words, receiving a payout for the full replacement cost is contingent on you actually replacing the damaged or destroyed items. If you choose to take the payout and keep the cash rather than replace the items, you will likely only be reimbursed for the actual cash value.
Policy Limits
Taking the time to understand the policy limits of your homeowner’s insurance policy is crucial to ensuring you have adequate coverage for your property and possessions. These limits set the maximum amount your insurance will pay out in the event of a claim, affecting everything from the structure of your home to your personal belongings.
Understanding the Total Coverage
Your policy’s total limit is the maximum amount your insurer will pay for covered losses. Knowing this figure is vital because it determines how much coverage you have in various scenarios, from minor repairs to major disasters.
Categories Under the Total Policy Limit
Dwelling Coverage: This part of your policy covers the physical structure of your home. You should make sure that the amount named in your policy is enough to completely rebuild your home at current market prices, including materials and labor costs.
Personal Property Coverage: Separate from dwelling coverage, this protects the contents of your home, including furniture, electronics, and personal items. It’s important to conduct a home inventory and assess the value of your belongings to ensure your coverage is sufficient.
Other Structures Coverage: This applies to structures on your property that are not attached to your main home, such as garages, sheds, and fences. The coverage limit for these structures is typically a percentage of your dwelling coverage.
The Importance of Adequate Coverage
You will want to make sure your policy limits accurately reflect the value of your home and belongings. Underinsurance can lead to significant out-of-pocket expenses, while overinsurance means you may be paying for more coverage than you need.
Structure B Coverage
“Structure B” coverage is another crucial component of homeowner’s insurance that you should understand. This part specifically addresses buildings on your property that aren’t attached to the main dwelling, including:
- Detached Garages & Shops
- Garden Sheds
- Fences
- Swimming Pools and Gazebos
- Accessory Dwelling Units
Assessing the Right Coverage Amount
The typical policy allocates a fixed percentage of your dwelling coverage to these additional structures, often ranging from 10% to 20%. Other times, it may be a fixed dollar amount, often between $50,000 to $100,000. However, the default amount may not always reflect the true value or replacement cost of these structures, especially if you’ve made significant improvements or live in an area with high construction costs.
Why Structure B Coverage Matters:
Our team at Lamont Bros. recently consulted with a Portland-area homeowner who experienced a major disaster on his property. The homeowner in question had an ADU on his property, which was severely impacted by a fallen tree.
Unfortunately, the policy limit for Structure B coverage, which in this case applied to the ADU, was set at $50,000. This amount was not even close to the actual cost of rebuilding the ADU to its former state, considering the extent of the damage.
Having been previously unaware that his insurance had a lower policy limit on accessory structures, this homeowner was put in a difficult position. The cost of repairs and rebuilding the ADU far exceeded the maximum insurance payout. As a result, he ended up having to tear down the entire structure because he couldn’t afford to rebuild it himself.
Steps for Determining Adequate Coverage:
If you have accessory structures on your property, it’s important to ensure they are covered up to their full replacement value by your homeowner’s insurance. Here’s how to do it.
Conduct an Inventory: List all separate structures on your property, noting their use, current condition, and any unique features that might affect their value.
Estimate Replacement Costs: Research the current cost to replace or repair each structure. This might involve getting quotes from contractors or using online tools to estimate material and labor costs in your area.
Review Your Policy: Compare the replacement costs with the coverage amount allocated by your policy. Ensure that the percentage of dwelling coverage assigned to other structures is sufficient to cover these estimated costs.
Adjust as Necessary: If you find that the default coverage is inadequate, talk to your insurance agent about adjusting your policy limits. This might mean increasing the overall dwelling coverage or specifically adjusting the percentage for Structure B coverage.
Code Upgrade Exclusions
Another crucial element of your homeowner’s insurance policy that you should understand is whether it includes code upgrade exclusions. This part of your policy comes into play most often when repairs to an older home require you to update your property to meet current building codes.
The Necessity of Code Upgrade Coverage
Building codes evolve over time, reflecting changes in safety standards, environmental regulations, and technological advancements. When an older home is damaged, restoration may require bringing it up to current codes in order to pass inspection. This is often a legal requirement that can carry unexpected and significant expenses when it comes into conflict with your insurance policy.
What Happens if Your Home Needs Code Upgrades?
Let’s say your home was damaged by flood and as a result, the entire electrical system needs to be replaced. Unfortunately, the old electrical system was outdated and did not meet current electrical code requirements.
In this case, the insurance policy may come into conflict with the code requirements for restoration. Your insurance may only pay for the cost of restoring the home to pre-loss condition, meaning the electrical system must be restored to what it was before. However, a building inspector will not approve the electrical system in its previous state, because it no longer meets the requirements.
If your home’s electrical system has to be upgraded in order to meet building codes, your insurance policy may not cover the cost of these upgrades. Should your policy include a code upgrade exclusion, you are responsible for covering the cost of those upgrades.
Relocation Coverage
When your home undergoes necessary repairs or rebuilding, it’s possible you may have to temporarily relocate. This is where relocation coverage, often referred to as Additional Living Expenses (ALE) or Loss of Use coverage, becomes critical in your homeowner’s insurance policy.
Scope of Relocation Coverage
Relocation coverage steps in to cover expenses beyond your usual living costs. This can include rent for temporary housing, hotel stays, extra food costs incurred by not having access to your kitchen, and sometimes even transportation costs.
The Fine Print Matters
It’s important to understand the limitations and conditions of your ALE coverage. Policies often set a maximum amount they’ll pay out or limit the coverage to a certain time frame. Knowing these details ahead of time can help you plan your temporary living arrangements more effectively and avoid unexpected financial strain.
Real-World Application: The Time Frame Challenge
Consider one real-life scenario of a Lamont Bros. client in which a flood severely damaged their kitchen, which had to be completely replaced.
After spending nearly a year negotiating with their insurance company, the homeowners were finally able to proceed with the necessary restoration. However, the repair process was expected to take several more months, coming dangerously close to their ALE coverage time limit. As a result, our team had to work diligently to ensure the restoration could be completed before the client’s ALE coverage expired.
In these cases, it’s not just the cost that matters but also the duration of coverage. Being aware of how long your policy will support your temporary relocation is as crucial as knowing the dollar limit.
Timeline Restrictions
Homeowner’s insurance policies come with specific timeline restrictions that can significantly impact your coverage. These restrictions dictate the window of time you have for reporting damage, filing claims, and completing repairs or restoration work. Understanding and adhering to these timelines is crucial for ensuring that you fully benefit from your policy without unexpected complications.
Reporting Damage Promptly
One of the first timeline restrictions you’ll encounter is the deadline for reporting damage. Insurance policies typically require that any damage be reported within a specified period after the event. Failing to report damage within this timeframe can lead to denied claims. As a general rule of thumb, you should report any damage as soon as soon as it occurs to avoid this pitfall.
The Repair Completion Window
Most homeowners don’t realize that their policy may also set a deadline for completing repairs. This is where understanding your policy’s specific timelines becomes especially important. For instance, some insurance policies give 12-18 months from the date of damage to complete repairs and submit all related claims. This timeline can pressure homeowners to complete repairs, especially if unforeseen delays occur.
In some cases, policies may offer extensions under certain conditions, but this isn’t guaranteed. It’s important to communicate with your insurance provider about any delays to seek potential flexibility in these deadlines.
Why These Timelines Matter
Adhering to the timelines set by your insurance policy ensures that you remain eligible for the full scope of your coverage. Ignoring these deadlines can lead to partial or full denial of claims, leaving you with significant out-of-pocket expenses.
Given the complexities of navigating repairs, permits, and inspections, it’s not uncommon for homeowners to bump up against these deadlines if they aren’t careful. Proactive management and early action on repairs can mitigate these risks. Moreover, understanding the potential for negotiation or extension within your policy can provide a buffer in managing your restoration project.
Strategies for Success
Immediate Damage Reporting: Make reporting damage a priority to kickstart the claims process within policy timelines.
Organized Documentation: Keep detailed records of damage, repairs, communications with your insurer, and related expenses. This documentation can be invaluable in clarifying timelines and justifying extensions.
Clear Communication with Your Insurer: Maintain open lines of communication with your insurance provider. Notify them promptly of any damage and keep them updated on the repair process, especially if you anticipate delays.
Want To Learn More About Insurance Restoration?
After reading this article, do you understand more about your homeowner’s insurance policy and how it might affect your restoration? If you’re preparing to file an insurance claim or begin repairs on your home, continue your research by downloading our free 3-Step Contractor Selection Guide. You can use the information and insights in this guide to help you find the best contractor for your insurance restoration project.
Are you ready to start working on your insurance restoration? If so, click the button below to schedule a free consultation with a member of our team. We’ll help you navigate the complexities of insurance work so you never have to face the challenges alone. Let’s take the first step of bringing your home back to life.