The 2004 Cedar and Pine Ridge fires in California led to numerous homes lost to forest and brush fire. After the cleanup many of the homeowners were shocked to receive claim settlements of only a portion of the total loss to rebuild. The homeowners were under the impression that replacement cost of their home meant that they would get replacement cost at the time the home was destroyed by fire. Unfortunately, this just wasn’t the case. Many of the homeowners had insurance policies for their homes that went back 15, 20 and in some cases more than 30 years and had not made any changes to the replacement value of their homes. If you recall from last week’s blog I indicated that “Replacement Cost Value is a static value that represents the replacement value of the structure at one moment in time.” Over time the cost to rebuild or replace these structures increases however the insurance value did not. In the end there were lawsuits and the process lasted years. What is important to remember from this case is that in the end most of the suits were denied because the responsibility for making sure the structure is fully insured lays with the owner.
Insurance carriers use coinsurance clauses in their policy contracts to require the owner of the structure to insure to full replacement cost value. You can avoid a costly mistake in valuation by having your buildings replacement cost value updated at least every two years. You can also elect to have inflation guard set up on your policy to increase the replacement cost value of your building at a set inflationary value each year. And, you should have Extended Replacement Cost or Guaranteed Replacement Cost coverage added to your policy to ensure that spikes in the cost of materials and labor in the event of a national or regional catastrophe don’t increase the cost of rebuilding your building beyond the valuation set by your insurance contract.
In the next several blogs I will explain in more detail what coinsurance is and what it does. I will also cover how to get a replacement cost valuation and what the purpose of tools like inflation guard, extended and guaranteed replacement cost is.