How much is too much? How much is not enough? Your insurance policy requires you to carry enough coverage to avoid penalties. Most policies written on a multi-family home that is held for rent contain a “coinsurance clause”. Depending on the percentage in your policy… it states that you must carry at least 80% or 90% and sometimes 100% of the replacement cost of the home. Know your percentage!
What is Replacement Cost? It has absolutely nothing to do with the market value of the home! It is the cost to replace/rebuild your home at the time of loss. I can tell you that this amount is much higher than the market value. Where a 3 family might sell for around $300,000, the replacement cost is north of $600,000!
So let’s assume your policy contains an 80% co-insurance clause. Your replacement cost is $600,000; you would be required to carry at least $480,000 to avoid a penalty. Now let’s assume you only carry $300,000 on the property. You only have ½ or 50% of the replacement cost of the house. Now let’s set your house on fire! The house burns down! Guess what??? You are only going to get a check for ½ or 50% of the total claim! Yup! You bought a $300,000 policy, but you are only going to collect $150,000! You need to ask your agent how much your replacement cost is and what your coinsurance percentage is! Make sure you have enough coverage!
That said, I have seen polices with way too much coverage too! Let’s say you insure the property at $600,000. We again throw a match on it and it burns to the ground. What will you do? Will you rebuild? Or just sell the land and move on to the next house? Let’s say you throw in the towel and buy another 3 family across the street for $300,000. Guess how much money you are getting from the insurance company? Yup… only $300,000!
All of these scenarios vary by insurance company. They all handle it differently. Don’t wait until you are sitting on a smoldering pile of debris! Talk to your agent. Make sure you are properly insured.
Pete Covill for any questions that you may have regarding homeowners’ insurance.
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