Don’t Insure Your House for Less than Replacement Cost

Don’t Insure Your House for Less than Replacement Cost

It seems that homeowners are always beleaguered with an incessant list of problems: a leaky roof, freezing pipes, and the neighborhood dog that keeps digging up your garden. While these are relatively minor, what would happen if some catastrophe did occur? Now, you may have homeowners insurance [ADD LINK TO “Homeowners Insurance – What and Why?”], but are you covered? Actually, let’s rephrase that: are you fully covered?

In this article, we’ll take a look into why homeowners need to know how much of their policy actually covers the replacement cost of their home.


 What’s Coinsurance?

Most homeowners policies contain something called coinsurance clauses. Basically, coinsurance clauses require a policyholder to purchase in an amount that accurately reflects the value of their insured property. The catch is that if the property is insured less than a predetermined percentage of a home’s value, the policyholder may not be able to recover fully after a loss occurs. Understanding this basic principle of insurance ensures that you’ll be fully compensated when disaster strikes.

Coinsurance is a property insurance provision that creates a penalty for under insuring. The insured’s loss recovery must be at least equal to a specified percentage (commonly 80%) of the value of the insured property.

Example: if a building valued at $100,000 is insured with a policy containing an 80% coinsurance clause, the policyholder must purchase at least $80,000 in coverage. If the policyholder purchased less than $80,000, they would be responsible for a proportionate share of the loss.


Finding Out How Much is Covered

From our previous example, let’s add in some real-world factors to determine if a coinsurance penalty will be in effect:

  • Suppose that the building’s owner originally purchased the property for $50,000 and kept an insurance policy in effect since then for that amount.
  • Because of rising property values, his property is now valued at $100,000.
  • A fire occurs and causes $20,000 worth of damage to the building.
  • The owner pays his $1,000 deductible and waits for his insurance policy’s coverage.

What’s the outcome?

Because there’s only a $50,000 insurance policy on the property, this equals only 50% of the property’s current value. To actually receive the full coverage on his property, the owner needed at least a policy that covered 80% ($80,000) worth of damages.

Here’s the kicker: Instead of receiving the full $19,000 ($20,000 of damages minus the $1,000 deductible), the owner is only entitled to a proportion of damages at the value they insured themselves at. What does the owner actually receive? $10,000 minus the $1,000 deductible, which comes to $9,000.


That leaves the owner to make up the additional $10,000 in out-of-pocket expenses. Not a great outcome!

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The real question that homeowners should ask themselves is: “If my house burns down, do I want half of my house back or all of it?” Regular appraisals can go a long way to making sure your home is adequately covered and not subject to a coinsurance penalty. To be absolutely sure, speaking with a qualified insurance advisor at RiskBlock  can help determine if you have enough coverage in the event of a loss.

Author: Liam Dai
Lead Insurance Advisor for RiskBlock. Disclaimer: This Blog/Web Site is made available by the author or insurance agency for educational purposes only as well as to give you general information and a general understanding of the insurance coverage, not to provide specific insurance advice. By using this blog site you understand that there is no professional advice and professional client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for professional advice from a licensed professional insurance agent in your state. All scenarios are different and unique to the situation.