On the afternoon/evening of the Marshall Fire, my partner at Ullrich Insurance (my dad) and I were in emergency mode. The terrible news was unfolding right before our eyes as we were watching on multiple news stations. An event like this is every insurance agent’s worst nightmare. It was very hard for us. We were reaching out to our clients who were in the affected areas to find out if they were okay.
The Marshall Fires have taught and continue to teach us some very important lessons about homeowners insurance. I am going to share one of these lessons with you now.
The importance of Extended Replacement Coverage on the Dwelling.
When an insurance company insures a home, they run a “Replacement Cost Estimate” to estimate how much it would cost to rebuild the home if it is destroyed. They use this rebuild cost as the Dwelling coverage on the homeowners insurance policy. The Dwelling coverage is the amount that the insurance company would pay to rebuild the structure of the home is it is destroyed.
Remember that homeowners insurance goes by “Rebuild Cost” not the market value.
There are times, though, when it would cost much more to rebuild a home than anyone could anticipate.
Let’s say that an insurance company insures a home and calculates that it would cost $500,000 to rebuild the home, so they set the Dwelling coverage at $500,000. Let’s say that the home is destroyed but it ends up costing much more than $500,000 to rebuild the home. What happens next?
A homeowners insurance policy has “Extended Replacement Coverage” on the dwelling. This means that the homeowners insurance policy would actually pay more than the Dwelling coverage. It would pay up to the Dwelling plus the “Extended Replacement Coverage” limit.
Here is how it works:
-Let’s say that a home has a Dwelling coverage of $500,000 and a 25% Extended Replacement Coverage limit. 25% of $500,000 is $125,000, so the Extended Replacement Coverage could add up to $125,000 on top of the $500,000. In this case, the most the insurance company would pay to rebuild the home is $625,000.
-Let’s say, on the other hand, that this same home with a $500,000 Dwelling has a 100% Extended Replacement Coverage limit. 100% of $500,000 is $500,000, so in this case, the insurance company would pay up to $1 million. $1 million is much better than $625,000.
-Some companies offer GUARANTEED REPLACEMENT COVERAGE, so if the Dwelling coverage is not sufficient to rebuild the home, there is no limit to what the insurance company would pay to rebuild.
(NOTE: Before an insurance company or an insurance agent can insure a home, they must always calculate the “Replacement Cost Estimate” to determine the rebuild cost of the home. They must set the Dwelling at least to this amount. They cannot lower the Dwelling knowing that they have Extended Replacement Coverage. The Dwelling must be greater than or equal to the Replacement Cost Estimate)
Too many people have a homeowners insurance policy with only 25% Extended Replacement Coverage. It is very inexpensive to increase the limit to 50% or even 100%. Here are some problems, though:
The bad news:
-Many people get their homeowners insurance from “online companies” where they choose their own coverages. Most of these companies only offer up to 25% Extended Replacement Coverage. Even if the online company offered more than 25% Extended Replacement Coverage, do you think that the homeowner understands enough about homeowners insurance to choose more than 25%? (Don’t let your clients go online and buy a bad homeowners insurance policy!)
-Most homeowners insurance companies only offer 25% Extended Replacement Coverage. Many people get their homeowners insurance from a “Captive insurance agent.” A Captive insurance agent is an agent who only represents ONE insurance company. If a person has their homeowners insurance with a captive insurance agent and if the most Extended Replacement Coverage available is 25% then that is what they will have.
-Some homeowners insurance agents don’t give their clients more than 25% Extended Replacement Coverage. Literally one week ago, a client of mine got a homeowners insurance quote from a different insurance agent. This insurance agent only put 25% Extended Replacement Coverage on the dwelling. I know for sure that this insurance company offers up to 100% Extended Replacement Coverage but the agent had it at 25% to show a low price to impress the lender. Not good! It’s not worth it!
-If you send your clients to us, we will make sure they have the coverage that they need. We represent many insurance companies and have access to the best prices and coverages. We have multiple insurance companies that offer up to 100% Extended Replacement Coverage or even Guaranteed Replacement Coverage. We will make sure that your clients have all the coverages that they need.
Let me know if you have any questions about this. I would be happy to talk with you more anytime.
Jared Ullrich, cell: 303-905-6764