Through Depreciation, Insurance Companies Have An Edge

As the market value of property, both real and personal, fluctuates, homeowners can protect themselves with a type of depreciation insurance termed replacement value insurance. With this policy, claims are paid according to the costs to rebuild or replace in the prevailing market. When purchasing or upgrading a homeowner’s policy, close attention should be paid to this aspect.

In addition to the conditions in a policy, other measures can be taken to make certain that there is enough coverage, and depreciation does not have a negative impact on payment.

Include specific policy endorsements

Endorsements, or riders, are modifications to a policy that can be purchased to provide extra protection. Some examples that provide a type of depreciation insurance are:

Guaranteed replacement cost coverage – This endorsement pays for the cost of rebuilding a dwelling home. It does demand that the requirements of the basic home insurance policy are first met.

Extended replacement cost coverage – Here, the home is insured for a pre-determined value. It generally includes a limit extension should costs be greater than initially determined. Not only does this protect against depreciation, it also protects against inflation.

Inflation protection regularly increases the amount of your homeowner’s insurance in order to maintain adequate coverage in order to replace your home or property, even as inflation rises. For example, if your golf clubs are covered and then stolen, and you originally paid $400 for them, and today it would cost $600 to replace them, the insurance company would pay the $600. The increases, or decreases should inflation decline, are based on the statistics in an inflation index.

Carefully review the terms of your homeowner’s policy. It should be insured for at least eighty percent of its value to avoid a coinsurance penalty. This prevents the insured from receiving less than replacement cost should a loss occur.

Policies that factor in depreciation

In general, insurance policies are either replacement value or actual cost value. Replacement value, though more expensive, does not take depreciation into account when paying on a claim. Actual cash value, on the other hand, does consider depreciation. For example, if you have a television set that you bought for $1000 ten years ago, the insurance company will reimburse you for the cost of the set, less depreciation. The result is, you will receive considerably less than what you originally paid for an item as the company will pay what they believe the item(s) to be worth at the time of the claim.

How depreciation is determined must be monitored. When filing a claim on an actual cash value policy, make sure the insurers use a recognized depreciation table. If you do not believe you have received a fair consideration, or you think the adjuster was just guessing, contact a public adjuster, and ask them to conduct an assessment of damage and value.

While there is not actual depreciation insurance, it is possible for homeowners to modify their policies to protect against depreciation and assure themselves of receiving a payment that will meet their replacement expenses.