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How is the settlement amount determined?
The settlement
amount depends on which type of policy you have. Having inadequate
insurance can affect the amount of compensation you get.
Replacement Cost and Actual Cash Value
Replacement cost provides you with the dollar amount needed to replace
a damaged item with one of similar kind and quality without deducting
for depreciation—the decrease in value due to age, obsolescence, wear
and tear and other factors. An actual cash value policy pays you the
amount needed to replace the item minus depreciation.
Suppose, for example, a tree fell through the roof onto your
eight-year-old washing machine. If you had a replacement cost policy
for the contents of your home, the insurance company would pay to
replace the old machine with a new one. If you had an actual cash value
policy, the company would pay only a percentage of the cost of a new
washing machine because a machine that has been used for eight years
would be worth less than its original cost.
Suppose, also, that the tree damaged your 15-year-old roof so badly
that it had to be completely replaced. If you had a replacement cost
policy, the insurance company would pay the full cost of installing a
new roof. If you had an actual cash value policy, it would pay a
smaller percentage of the cost of replacing it.
Extended and Guaranteed Replacement
Cost
If your home is damaged beyond repair, a typical homeowners policy will
pay to replace it up to the limits of the policy. When the value of
your insurance policy has kept up with increases in local building
costs, a similar dwelling can generally be rebuilt for an amount that
is within the policy limits.
Some insurance companies offer a replacement cost policy that will pay
a certain percentage over the limit to rebuild your home—20 percent or
more, depending on the insurer—so that if building costs go up
unexpectedly, you will have extra funds to cover the bill. These are
called extended replacement cost policies. A few insurance companies
still offer a guaranteed replacement cost policy that pays whatever it
costs to rebuild your home as it was before the disaster. But neither a
guaranteed nor an extended replacement cost policy will pay for a house
that's better than the one that was destroyed.
Mobile Home Policies
If you own a mobile home, you may have a policy based on replacement
cost, actual cash value or, in a few cases, a "stated amount." With a
stated amount policy, the maximum amount you receive if your home is
destroyed is the amount you agreed to when the policy was issued. The
depreciation in the value of your home is not considered in the
settlement. If you opt for the stated amount, update your policy
annually to make sure that the stated amount will cover the realistic
cost of replacing your mobile home. Check with local mobile home
dealers to find out what similar homes sell for now. |
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