When you are purchasing insurance for your home or business, there are many insurance terms that people often overlook or are confused about. An important term used when discussing property insurance is Loss Settlement. This brief article will explain why the term Loss Settlement is important to understand as respects your property coverage.
In the event of a covered claim, Loss Settlement refers to how an Insurance company determines the amount paid for the settlement of a loss. This loss settlement option is agreed to by the policyholder and the insurance carrier at the time of issuing your new policy. There are various options but for simplification, we will discuss the two most commonly used: Actual Cash Value and Replacement Cost.
Actual Cash Value (ACV) represents the amount equal to the replacement cost of the building with like kind and quality minus the depreciation that was incurred over time. Some might insure for the purchase price of a depressed building or their invested amount rather than choose the full cost to rebuild said building. Therefore, if you chose ACV, you will never receive more than this specified limit in the event of a total loss. In the event of a partial loss, you will be paid the replacement value, reduced by depreciation (which is a reduction in the value of an asset with the passage of time, due in particular to age, wear and tear and deterioration) thereby a percentage of the loss. This might be the most cost-efficient option when the market value of a building is much less that the cost to rebuild it, but you can see whereas it is a dangerous one at that.
Replacement Cost (RC) is the cost to replace damaged property with the same like, kind and quality without the deduction for depreciation. The value to replace the property, at current market costs, is what is used to insure the property. The intent is to bring the insured back to pre-loss conditions and will replace new for old with like kind and quality. Therefore, you will not be impacted by depreciation as you would in Actual Cash Value. With Replacement Cost, you need to be sure you are insuring the property for the correct amount to avoid any penalties at the time of a claim. This is a better option then A.C.V. and as such, comes at a higher cost.
As an enhancement to Replacement Cost, some options to “Guarantee” or “Extend” Replacement Cost, are sometimes available. This coverage is often available on Homeowners products. This is done to protect the dwelling from pushing beyond the insured limit because of inflation and not having enough insurance to replace said building. This enhancement allows for an extension of coverage to minimize any out of pocket expense to put the home back to pre-loss condition. Another option is Agreed Value and is more commonly associated with Commercial Properties. Agreed Value is when you and the insurance carrier agree to an insured amount prior to a loss and waive the co-insurance requirement. In this option, you will provide a signed statement of property values and agree the value they are insuring is appropriate. The insurance carrier will pay to repair or replace up to the Agreed Value limit without any penalties.
It is important to understand the various options that are available for Loss Settlement when you are purchasing insurance. You should be aware of the difference in how coverage would apply to make sure the premium savings is worth the risk. While the most cost-efficient option might be tempting, you need to be aware of the concerns with them. Depending on your risk tolerance and condition of your property, the lowest cost might not be the best option. Please talk to an insurance professional to understand the options and be sure you are choosing the correct one. Call us today at 518-464-0059 or email us at email@example.com to discuss your specific needs or concerns.
Also Read: Claims Corner