Buying a home? Need homeowners insurance? Beware the perils of insufficient property insurance limits.
When selecting the amount of property insurance coverage, a homeowner considers the cost to replace only dwelling’s structure – not the market value of the entire property. However, choosing this amount is not always simple.
Many owners of homes and condos desire premium savings, and try to reduce their insurance limits to match up with their loan amount only. This minimal approach will have negative repercussions on claims of any amount.
For example, let’s say a home’s structural replacement value is $400,000, and the policyholder decides to buy $300,000 of insurance. If a fire loss occurs, causing only damages of $100,000, one would assume a full payment by the insurance company. But actually, a reduced payment will be paid.
Calculations are made by dividing what was purchased ($300,000) by what should have been bought ($400,000). The result in this case is 75% which is multiplied by the amount of the loss ($100,000). The calculation works out: $100,000 X .75 = $75,000.
The policyholder will receive $75,000 for the $100,000 claim, matching the percentage of deficiency inmate overall policy.
In practice, a provision exists in most policies limiting the above ratios, however, pay close attention to your limits by meeting with your insurance agent early in the buying process.