HOME INSURANCE

Homeowners Insurance Policy Limits

What Limits Should I Set on My Policy?

The "dwelling" limit should be the amount it would cost to replace your home. This may have nothing to do with the purchase price or the current market value of your home. Your insurance policy is not governed by the real estate market, but by the cost of the materials and labor involved in rebuilding your home. Insurance companies have in-house formulas that they use to evaluate the replacement cost of your home if you do not come up with a limit. These formulas are not necessarily precise, so different insurers are likely to suggest or require different limits of coverage for your dwelling limit.

As for the "contents" limits, it is usually around 50% of the dwelling amount; however, only you can evaluate the replacement value of the things you own. Be sure to take into account such things as your books, clothing, and appliances. Often, people concern themselves with things such as jewelry, computers, furniture, and stereo equipment and don’t account for some of the more commonplace household items.

Two major problems suffered by homeowners on their Residential Property/Homeowners insurance policies in the Northern and Southern California fires were

(a) Many of the dwellings were under-insured, i.e., insured for amounts inadequate for rebuilding. Insurers sometimes refer to this as inadequate insurance-to-value.

(b) The problem of increased cost of construction was evident in many situations. When rebuilding, homeowners have to comply with new building code requirements, which in some instances necessitated new foundations being built, neither of which may have been considered when setting the replacement limits.

It is very important to know and understand the coverage you have. Make sure values are current and satisfy policy requirements. Ask if coverage is provided for building upgrade/code changes.