Along with most houses these days, my home’s market value has dropped considerably in the past couple of years. And since the replacement value of my house is less, I thought I would reduce the limit of liability amount with my insurance company. This should result in a correspondingly lower annual premium. But my insurance company is telling me that the amount of my limit of liability is determined by their computer software and I am not allowed to reduce this amount. (This amount has not changed since I bought the house 6 years ago.) Is this right? Can insurance companies dictate how much a homeowner can insure their house for? The way I see it is if the house value has dropped, the amount of insurance should drop too.
My policy declaration sheets got me a little confused. The column heading for the various coverages was written as ‘Limit of Liability’, and so that was the term I was using. But the specific coverage I was talking about is listed as ‘Dwelling’. So that is the figure I thought was high in comparison with the market value of my house.
And thanks for clarifying the distinction between market value of a house and the cost to rebuild the house. Isn’t it strange, though, that there should be such a disparity between the two? My dwelling coverage is 0,000 but the market value is ,000. Something just doesn’t seem right.
My policy declaration sheets got me a little confused. The column heading for the various coverages was written as ‘Limit of Liability’, and so that was the term I was using. But the specific coverage I was talking about is listed as ‘Dwelling’. So that is the figure I thought was high in comparison with the market value of my house.
And thanks for clarifying the distinction between market value of a house and the cost to rebuild the house. Isn’t it strange, though, that there should be such a disparity between the two? My dwelling coverage is 0,000 but the market value is ,000. Something just doesn’t seem right.
Home | Insurance | Blog article: Can a homeowner reduce his/her limit of liability on his/her homeowners insurance?
Ginger 11:14 am on August 22, 2010
Everything about replacement cost vs. market value that has already been posted is absolutely true, BUT you are confusing your insurance company and me when you speak of liability.
The liability portion of your policy is completely separate from the insurance value of rebuilding your home. Liability covers you if you are negligent and someone is injured due to your negligence. That is built into your policy and there is usually a minimum such as $100,000. If you are talking rebuild, you are talking dwelling coverage, if you are talking liability, you are talking negligence coverage and the two have nothing to do with each other.
Update to add from the addtl. info you provided:
It’s not unusual for the market value and replacement value to be quite different. There are many places in the U.S. where it is actually cheaper to buy a home than build one. You can thank the economy for that one. If you’re dead set on the idea that the two amounts are so far off and it doesn’t make sense to you, contact a builder/contractor and ask them to give you a rough estimate of what it would cost, in your market, to build a home with the same square footage, same materials, and be sure to let them know what type of flooring, lighting, etc. that you have now. Keep in mind, the insurance company will have to replace your home with new materials if it is a total loss. NOTE: Never use the tax appraisal info to determine the value of your home (rebuild or replacement) that is often far too low and is just another factor that has nothing to do with insurance value.
mbrcatz 11:14 am on August 22, 2010
OK, I think we’re talking two different things. When YOU talk about "replacing" your home, you seem to be talking about cost to REPURCHASE your home. The standard homeowners insurance policy, the HO3, is a cost to REBUILD policy. And I promise you, construction costs and materials costs have NOT decreased, like market values.
So. If you bought a "cost to rebuild" policy, you MUST insure it for the cost to rebuild. Seems to me, you don’t WANT to rebuild your house. If you have a kitchen fire that costs $50,000 to fix, you don’t want the insurance company to pay to have it fixed, you want them to just pay you a percentage of the total value of the house, based on square footage, minus depreciation for age, right? So if your kitchen is 20% of your living space, and is 40 years old, and you have a kitchen fire that would cost you $50,000 to fix, but your "market value" is $125,000, you’re going to be just happy with a $5,000 payment, for the market value of just your kitchen, less 40 years depreciation, right? Maybe not.
Listen, when people say "I want to lower my coverage", that’s not really what they mean. They don’t REALLY mean, "I want to shortchange myself come claims time". They really mean, "I want to pay less for my house insurance". And there ARE ways to do that.
The vast majority of claims are NOT total losses – they’re partial losses. A tree branch through a roof. A drunk driver landing in the living room, via the front porch. A kitchen fire. If you have a PARTIAL loss, you’re damn well going to want the insurance company to pay to FIX the damage.
There ARE other types of policies out there, besides the replacement cost policy. They all COST MORE. The CHEAPEST way to insure your house, is on an HO3 style, replacement value policy – where you have to insure your house for darned close to 100% of the cost to REBUILD it, regardless of market value.
But yes. If you want to pay more, you can buy LESS coverage, on a different basis – functional replacement cost (no matching, no like kind and quality, bare minimum to "make it work", paint instead of wallpaper, vinyl peel & stick floor instead of tile, etc), market value (see example above), even "flat" coverage, with no coinsurance.
You can talk to your agent. Any decent agent, will steer you to the least expensive, most coverage style policy, but if you insist and they are willing, you CAN buy less coverage at a higher price. It’s just going to be a different policy type, likely with a different company.
Caveat Emptor 11:14 am on August 22, 2010
Liability coverage has NOTHING to do with the physical damage/replacement coverage or your home’s market value. Liability insurance protects you against injury to others or damage to their property that occurs on YOUR property (i.e., someone falls down, breaks their leg and then sues you).
And a drop in market value does NOT equate to an equal drop in replacement cost. Replacement cost is based on just that: the estimated RECONSTRUCTION cost. It is not a direct reflection of market value of the existing house.