By: Greg Barcomb
The following blog is the 1st part of a series of posts focusing on the different aspects and terms of an insurance policy.
The worst time to try and figure out what’s in your insurance policy is after a loss. The chaos and anxiety that follows an event that triggers an insurance policy is enough without having to then understand what coverage you have and how you will be indemnified. We all have heard stories and seen commercials highlighting the horrors of not getting what you “thought” you would out of your insurance. But how is that possible? Isn’t homeowner or car insurance all the same? Is it not just about whether some companies are cheaper than others? Not really.
It isn’t just about the company you purchase from but also about the “kind” of policy you purchase. Not all policies are the same and companies often have different policy products to offer. Now, before I put you all to sleep with confusing insurance language and boring technical terms, we need to understand how these 100+ page insurance contracts came to be 100+ pages. The contract needs to outline EXACTLY what risks you are transferring onto the insurance company, and also, exactly what you are NOT transferring. Imagine you have an inquisitive little 5 year old in the back seat of a long car ride and every question starts with “what if…?” Now imagine having to answer all those hypothetical questions not only clearly, but in a way that must hold up in court of law… That’s basically an insurance policy.
Insurance companies aren’t out to “get you” or scam you into buying something you can’t use, they have to offer options to the marketplace. And those options change the limits and exposures covered in the policy. As Benjamin Franklin once said, “the bitterness of low quality remains long after the sweetness of low price”. Now I know that sounds like a cheesy sales line, but from what I remember from History class, Ben Franklin was a pretty smart guy who said a lot of very useful things. So let’s see if we can gain some knowledge so we better understand what it is we are purchasing when it comes to insurance. And we will start with the basics.
Now go grab a cup of coffee and get comfortable- because here comes the insurance lingo! Remember, the devil is in the details!
If nothing else, one of the more important things to look for when purchasing home or auto insurance is the type of loss valuation, or basically what and how you will be paid in the event of a covered loss. These come in a couple different ways, here is quick outline of the major ones:
Replacement Cost: This will replace the full cost of the property with like, kind and quality materials without the cost of depreciation. The caveat with replacement cost is the insurance company will require you to insure the property/building within a percentage of full replacement cost (which is often more than the cost of the home, because it takes more than just the rebuild into consideration). If you do not insure to within the required amount, you could face a co-insurance penalty. There is way too much about co-insurance to get into for this blog…. So we’ll save that for another day. For the purpose of brevity, let’s just state that Co-insurance penalties are something you want to avoid. Having proper limits and understanding how the policy works will make your loss settlement go much easier.
Actual Cash Value: This valuation starts the same as a replacement cost, but then subtracts out depreciation. So you may have purchased your car for $30,000 three years ago, but you will only receive the actual cash value at the time of the accident, not the cost of a “like or kind” new model. These policies are often much more cost effective, and to be fair, in the right situations make a lot of sense.
Agreed Amount: In certain situations, insurance companies will accept a specifically requested amount of insurance from the insured, and it is agreed upon by signing a “statement of values”. Agreed amount or agreed value, offers the most clear cut valuation option. This is often done for classic cars that are difficult to identify a true “replacement cost” and don’t really depreciate the same as your standard car.
I promised myself I would keep these blogs short(ish), so I will leave it with just these three. This is only skimming the surface of different things to look out for in an insurance contract. But have no fear, there is an entire profession dedicated to looking at these differences and advising you to make the best decision for what you need/want out of your insurance. Knowledge is power!