Ok you finally decided where you are going to live, you made the offer they accepted and now as if you aren't tired enough of making decisions the lender requires you go out and get this place insured! All you want to do is start buying new furniture……..ARGH!
Unfortunately it must be done and the more you know about the subject the more informed you are the better your decisions can be. I have owned our present home since 2002 plus I am a Realtor but some of the following terms were not even on my radar…… Replacement Cost…..Market Value …ALE …Law and Ordinance Coverage…..I know you were about to have a heart attack when I put ALE in the mix….And NO that is not having to take your agent out for a beer……
It really is not all that complicated it is just another thing you must educate yourself about if you want to take care of yourself and probably the largest single investment you will ever make…Have I scared you yet? These are terms that will help you understand some of the jargon the insurance agent is going to be throwing at you…….
And if he is not you might ask why not?
Replacement Cost or Actual Cash Value: Replacement Cost is the amount of money needed to repair your home without any depreciation for normal wear, tear and usage. Cash Value method is cost to repair your home as well but it takes into account that the roof is 15 years old and its life expectancy is only about 20 years…. So your reimbursement would be for the five years left in the roof……That one is a no
Market Value vs. Replacement Value: This is particularly hard for the buyer of a brand new home to get their heads around. Most insurance companies want you to carry a replacement value of the home (often 80%)….Market value is what you could sell it for today on the spot……..not how much it would cost to rebuild. The insurance company must factor in such acts of nature like hurricanes or fire ( that is not an act of God, what was I thinking? But you get the idea, right?)…….perhaps at a later date due to inflation or in case of natural disaster materials are scarce and increase rapidly in cost....not to mention labor going up because it is wide spread damage. If you have a home that would cost $200,000 to replace and you have only $100,000 coverage and you have a partial loss of $50,000 the company may very well award you with $25,000. This is 50 % of the claim which is a formula derived from “amount of insurance needed divided by the amount carried, times the amount of the loss …” All right I don’t like it either but let’s not skimp here for goodness sake
ALE / Additional Living Expense: When your home is so damaged that you cannot live in it this is what covers that additional expense. Generally it will pay only reasonable excesses above what it would normally cost for you to live. Insurance companies do not normally pay this until a civil authority has pronounced the home not safe for habitation. The other element is that the state does not require that these expenses are paid up-front……so keep good records….Terms and conditions vary from policy to policy so Read carefully. Are you getting the picture you have got to ask lots of questions?
Mold and Fungi: Do not assume your company will include damage from these substances….and when they do you must be aware of the many limits that are placed and in what situations they will actually pay. Some policies will only cover certain perils. The sad part is that flood is not a covered peril on your policy( unless you were wise enough to buy flood insurance .*)So let's say you have a flood and you did not purchase flood insurance the company would not pay for mold as a result of a flood. Good Grief this might take some real thought before you decide what to do......
Law and Ordinance Coverage:This is confusing to say the least. This issue hinges on the perpetual agenda of governments to set standards for construction that offer a minimum level of safety. Do not assume this is a modern approach to the welfare of the public, apparently some 4000 years ago, Hammurabi was tinkering with building codes. The primary difference was if there was a major problem he got the builders head on a platter….that might have some merit today? (I did not mean that really!!) With our states recent history of hurricanes the building codes have been changing fast and furiously. The problem is that not all homes existing are young enough to have been built to today’s more stringent code. It seems that if only 50 % of the property was damaged but the code says the whole structure must be replaced the insurance company would pay up to the policies limit toward tearing down and rebuilding the undamaged 50%. Insurance companies must include coverage at 25% of the dwelling limit, which as I understand it means the amount you are insured for ( you have to sign a waiver not to have this coverage) In addition to the 25% the insurance companies must offer a limit of 50% above your insured amount….but some will allow you to purchase more.
The best advice is to talk to more than one company
Reference for much of this was taken from Jeff Atwater, Chief Financial Officer Fl Dept of Financial Services
* Your Realtor will check to see if you are buying in a zone that is prone to flood ( make sure you ask if the home you are interested is in a flood plain) and your mortgage company will recquire flood insurance if you are .....otherwise it is optional.