In the aftermath of the devastating Marshall Fire, home insurance is top of mind. For those of us fortunate enough to have escaped this urban wildfire, now is the time to review your insurance policy.
It cannot be said often enough: homeowners should check the value of your insurance policy each year. The non-profit Rocky Mountain Insurance Information Association (RMIIA) recommends homeowners conduct an insurance policy “check-up” each year. The goal is to keep up with local building costs and adjust your policy to cover remodeling or home improvements and your personal belongings, according to RMIIA.
But what do you need to know about your homeowners insurance policy? It is critical to know what your policy covers and have confidence it will cover the cost of rebuilding, especially at the moment you need it. RMIIA notes some of the basics are:
The typical homeowners insurance policy covers damage from fire, windstorm, hail, water damage (excluding flooding), riots and explosion. The policies often cover other causes of loss, like theft and the extra cost of living elsewhere while the structure is being repaired or rebuilt.
Your insurance needs to cover the cost to replace the structure of your home and your personal belongings.
The association describes three ways to insure your home:
• Replacement cost pays the cost of replacing the damaged property without deduction for depreciation, but is limited to a maximum dollar amount.
• Extended replacement costs cover costs up to a percentage – usually 20% – over the limit. It protects against a sudden increase in construction costs.
• Actual cash value covers the cost to replace your home minus depreciation costs for age and use. For example, if your roof is 15 years old and the life expectancy of your roof is 20 years, the roof’s cash value would be a small percentage of replacement cost.
The RMIIA website suggests that you “should insure your home for the total amount it would cost to rebuild your home if it were destroyed. That’s not the market value, but the cost to rebuild.”
To get a quick estimate on the amount to rebuild your home, multiply the local building costs per square foot by the total square footage. Check with your insurance agent to get the local building rates in your area. In addition to construction costs and square footage, other factors that affect the cost to rebuild include – but are not limited to – type of exterior wall construction, house style, number of rooms and bathrooms, roof type and special features.
RMIIA recommends asking your insurance agent for an inflation guard clause to “automatically adjust the dwelling limit when you renew your policy to reflect current construction costs in your area.” Even if you have an inflation guard clause, you should still double check your policy each year to be sure it is keeping up with local building costs.
Your personal belongings can also be insured in two ways:
1) Replacement cost coverage pays the dollar amount needed to replace damaged personal property with items of like kind or quality without deduction for depreciation.
2) Actual cash value pays the replacement value of damaged property minus depreciation. It’s important to note that unless your homeowners policy specifies that personal property is covered for its replacement value, the coverage is for actual cash value.
Be sure to check the limits of your policy on personal items – such as jewelry, silverware, furs and computer equipment. RMIIA recommends that if the limits are too low, consider adding a special personal property endorsement to your policy.
Make an inventory and document everything you own in your home and in other buildings on the property by writing it down – along with serial and model numbers and date of purchase – and take still or video pictures. Include receipts when you can.
For more information, visit the following websites for excellent resources on insurance coverage:
Rocky Mountain Insurance Information Association
Home Builders Association of Metro Denver
Colorado Department of Regulatory Agencies Division of Insurance
By Tom Kalinski. Tom is the broker/owner of RE/MAX of Boulder, the local residential real estate company he established in 1977. He was inducted into Boulder County’s Business Hall of Fame in 2016 and has a 40-year background in commercial and residential real estate. For questions, email Tom at [email protected], call 303.441.5620, or visit boulderco.com.