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Todd Talbot
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Insurance...What Type of Policy Do You Have?

The mission of an insurance policy is to bring the party at loss, back to where they were before the loss occurred.  It is difficult for an insurance company to replace the exact same appliances, colors, brands or models of any belongings lost in a flood, fire or other insurable event, nevertheless replacing those same items with similar wear and tear. 

Because this would be pretty much impossible, insurance companies adjust prices of new replacement items with something called, depreciation.  The logic is that the items lost in some catastrophic event have had some amount of wear and tear.  The insurance company will subtract some amount of depreciation off the new value of any item of loss then give you that new depreciated value in cash.  For example, if you bought a dishwasher for $400 5 years ago and it was expected to have a 10 year life, the insurance company will give you $200 for that dishwasher if it suffered some type of insurable loss.

It will not matter if you have $300,000 worth of coverage and only $200,000 in damage.  The insurance company does not have to give you the $300,000 policy limit or even the full cost of the damage, unless you have a replacement policy.  A replacement insurance policy will pay the full cost of replacing any items of loss at today’s prices without depreciation.  Replacement cost policies do have higher premium costs.   

Can you imagine getting only 50% of the value of everything you own, then trying to replace it with today’s prices.  This just happened to my neighbor’s home.  They purchased the home next door to mine in April 2017.  After a 4 month remodel they moved in around late August.  Not even a month after moving in, some boxes caught fire on the side of their house, the flames hit the attic and the home was destroyed in no time.  As if this wasn’t bad enough, now they had to deal with the insurance company.  Thank God, they thought, we have insurance.  It didn’t turn out as easy as they thought.

The owners received 3 separate repair quotes to repair the fire damage.  All 3 quotes exceeded $200,000.   The insurance company’s estimate was $133,000.  This was at least $70,000 less than 3 other quotes.  But that wasn’t the real problem.  The real problem was the insurance company was only going to give them $88,000 of that because they calculated a 33% depreciation rate as the existing wear and tear.  That’s right, the insurance company claimed a 33% depreciation rate on a house that was completely remodeled less than a month before the fire.

Nobody wants to think it’s going to happen, but when it does it going to count if you made the correct decision up front.  Get a quote for replacement insurance. 


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