If you have never worked in insurance before you may be under the impression that an insurance agent’s main job is to sell insurance. That would be an understandable, yet wrong, assumption. I am well into my second decade in the industry now and if there’s anything I’ve learned it is that my main job is to answer questions and educate. One reason is because a great deal of people have no idea how in the heck the thing I am selling them actually works.

Sure, they understand the theory behind insurance. It goes something like this: “Bad things don’t happen all that often and don’t happen to most people but just to be safe, we’ll all pool our money together and that way when something really bad DOES happen to one of us there is a pot of money to take care of them. For everyone else, we get a piece of mind in exchange for our premium, knowing that there is a safety net if we crash our car or our house burns down. “

But the reason I need to be a teacher is because the insurance policy you buy isn’t a paragraph like what is written above. It’s a 40 page contract (if you’re lucky). Why is it 40 pages? This is why. And even though we all know that we should read our contracts sometimes you just need an answer right now, and if you are reading this post then this is one of those times.

The question of valuing a home under a homeowners insurance policy is one of the top three questions we are asked. (Stay tuned for blog posts on the other two). In general it goes something like this: an astute client will call us and ask why their $100,000 home is insured for $200,000. They wisely perceive that they are being charged on the basis of how much insurance they buy and sense that they are buying more than they need.

The answer lies in the wording of the policy and what is actually supposed to happen when you have a claim. Most of the homeowners contracts we sell (and most sold by any reputable agent) settle claims on a REPLACEMENT COST basis. This means that if something is destroyed, we give you a new one. Specifically, it means that we replace what you lost with something of like kind and quality. When it comes to losing your TV that is fairly simple. Did you have a 60” LG 1080p? No problem. Google it and check the price of a new one. Or better yet, if you are up here in northwest Ohio shop local and stop in at Hefner’s TV –they are amazing. Either way, you just get a new one like what you had.

But what about your home? Homes are not as interchangeable as TVs and even if you have a tract-built home it still will have some unique features and there probably isn’t a similar one just like it for sale. And even if there IS you would have to move there and might lose the benefits of living in your neighborhood. Your insurance contract is a promise to make you whole and as you can see, the only way to really honor that contract and get back what you lost, to make you whole again (in insurance lingo we call this “indemnification”) is to build you back another home exactly like what you had. And that is going to cost more than simply buying a similar home for sale on the market.

Once we start thinking like that we begin to see why the value shown on your home is higher than its market value. The market value of your home is simply how much money you can get to GIVE YOUR HOME UP. It is not how much money it costs to REPLICATE your home. Ideally the value shown on your homeowners policy should be the amount that it would cost a contractor to build a brand new home (of the same size and with the same features as yours) from the ground up. We also need to throw in there enough money to pay for any debris removal and site-clearing from the damaged home, which can be quite extensive—especially if there is a fire.

When you start comparing your home not with other homes of the same age in the same neighborhood, but with brand new homes being constructed, then you start to see why—if you want to get the full value of your insurance and be made whole after a claim—you need to insure the home for what it would cost to rebuild it.

Now that all sounds great but what about the person who was just about to retire, downsize, and by a condo near the grandkids, or for that matter anyone who doesn’t want to rebuild? No worries! Just as the personal property section of your policy has an option for you to just take a depreciated cash value as claims settlement instead of replacing your lost items, there is a similar option for the home itself. If you do not want to rebuild you can simply take a “cash value” settlement for the home. In this case you are electing to be “made whole” not by getting back what you lost but by getting back the amount of money that you could have gained by voluntarily giving up what you lost.

Still have more questions? Have a unique situation?

Give us a call or shoot an email to mail@sullivaninsuranceinc.com and we will help you sort it all out. Insurance is a great thing but sometimes a complicated thing. That’s why we’re here to help!