Insurance to Value is a Must

Your home will likely be your largest financial investment and you want to ensure it’s fully protected should it ever be damaged or destroyed by fire, extreme weather or any other peril. But how much coverage does it need?

Your insurance broker uses an evaluation program to calculate your home’s replacement value, which is the total cost to rebuild it from the ground up using the same materials and finishes. Factors used in the calculation include: the construction type, i.e. frame or brick, location, square footage, number of washrooms, its age and the overall condition. This amount is shown on your insurance policy as ‘Section A: Building Amount.’

Although you can choose the amount of coverage for your home, there are four reasons why you should always insure it to its replacement value.

Co-Insurance Clause

If your home is knowingly underinsured and there’s a claim, your insurance company will not pay the full amount of the settlement. This is known as co-insurance. For example: your home’s replacement value is $400,000 and your policy ’s co-insurance clause is 90%, which means your home is to be insured to at least 90% of the replacement value, which is $360,000. You decided to insure it for $325,000 and there’s a $100,000 loss.

Instead of receiving the $100,000 settlement, you will only receive $90,278 to make the necessary repairs. Formula: (325,000 / 360,000 x 100,000 = $90,278).

Total Loss

In the event that your home is destroyed in a loss, you want to be sure there are enough funds to rebuild it. If there isn’t enough money in the settlement to cover all of the work and materials, you will be expected to raise the difference on your own.

Using the same example above, instead of receiving a $400,000 settlement, you will only receive $361,111. Formula: (325,000 / 360,000 x 400,000 = $361,111). You will need to raise $38,889 to finish the work.

Mortgage

If you have a mortgage on your home, the lender will insist that it’s insured to its replacement value in order to protect their interest.

Guaranteed Replacement Cost

If you insure your home to its replacement value, your insurance company may offer a valuable optional endorsement called ‘Guaranteed Replacement Cost’ (GRC), which provides additional coverage should your home be destroyed in a claim and the costs to rebuild exceed your calculated replacement value limit. Let’s have a look at the following example.

Again, your home’s replacement cost is $400,000 and this time it’s totally destroyed in a fire. The final cost to rebuild it is determined to be $425,000, which is $25,000 over your limit. Without GRC, your insurance company will pay up to limit, which is $400,000, leaving you $25,000 short. With the GRC endorsement on your policy, they will pay the full cost to rebuild your home: $425,000.

How do you keep your home insured its replacement value? Your insurance company will automatically adjust your policy’s building amount coverage on every renewal based on current construction costs and the rate of inflation.  

For your part, always report any planned renovations to your broker before the work begins and we will have the policy coverage amended accordingly.