Question

Discuss the concept of Replacement Cost Coverage for Homeowners Policies, the danger that many homeowners face with replacement cost coverage and the result if a homeowner does not carry enough coverage.

Answer 1

If you have insured your house or personal belongings and it got damaged, you can claim reimbursement from your insurer. The most common settlement provision of home insurance policy is replacement cost value and actual cost value. In replacement cost coverage, the insurer pays the full replacement amount of the item or loss. It is usually defined as the cost to replace the damaged property with materials of like kind and quality without any deduction for depreciation.

The danger that many homeowners face with replacement cost coverage is that the cost to rebuild the home vary over time and 100% guarantee cannot be assured that the replacement cost coverage is sufficient to rebuild the house.

If insufficient coverage is purchased to rebuild the home, the uninsured cost has to be paid out by the insured which is a huge burden.

The only solution to overcome the above dilemma is that homeowner should review their policy frequently.