A modern Chicago brick condo...what's its ITV?

Over the past few months, the economic downturn has caused many of us to reevaluate our household budgets and seriously reconsider our spending. Along with this comes the direct insurance companies inundating our mailboxes with ?promises? to save you hundreds of dollars on your home insurance. If it sounds too good to be true…they generally don’t really detail the important coverages and benefits that you will lose when you “save” all that money. And the devil is in the details.

My Home Value Dropped…Should My Insurance Coverage Drop?

In an attempt to save money, more and more of my clients have called to let me know that their property values have dropped so they expect their insurance premiums to do the same. My response to these comments usually doesn’t sit well with many since, being an insurance agent, my job to provide comprehensive coverage and sound risk management.

It’s About Rebuilding Costs, Not Market Value

Reputable insurance carriers utilize a third party source such as Marshall & Swift, to calculate the actual building replacement cost of a given property. This concept is called Insurance-To-Value (ITV) which focuses on a building’s unique features, (number of baths, number of bedrooms, construction type, size of decks, and many other interior and exterior upgrades) not solely the square footage. This method gives insurance agents a better sense of what it will really cost to send a contractor out to rebuild your house, if need be. Based on a few total losses I have been involved with over the years, when having to rebuild your home is not a good time to come up short by a few tens of thousands of dollars.

An Example of Over Insuring

For example, a homeowner spends $1,000,000 to purchase a 2.5 story frame home. It has three bedrooms, three bathrooms and is in Lincoln Park. Of course it has generous upgrades. After consulting with the homeowner, the ITV is calculated to be $650,000. Often in this situation homeowners feels slighted because they just spent $1 million on the house, but I only want to have them insure it for $650,000? After explaining the calculation and pointing out that they won’t have to purchase the land again, they understand the calculation better and are more comfortable. However, some homeowners remain skeptical, so then I suggest they look at a policy that has TRUE Guaranteed Replacement Cost coverage. This gives the homeowner the peace of mind by insuring the home at $650,000 ( which is 100% of ITV). However, in the event of a total loss and the rebuild cost somehow is actually $1 million, the insurance carrier will pay the $350,000 difference.

But…It Works the Other Way Around Too

Let’s look at an example on the other extreme. A person finds a great brick three-flat in perfect condition in Logan Square. It is a foreclosure and they pick it up for $300,000. However, the ITV of this building is likely to be calculated at somewhere around $600,000. Just because they got a great deal, doesn’t mean they can rebuild the building for what they paid for it! So, it must be insured at the ITV level to obtain the best rates and the true guaranteed replacement cost.

Of course, the person is going to only want to insure the building for the purchase price. A good insurance agent will still push to have the house covered at $600,000 because if the house is insured at $300,000, a ?coinsurance penalty? can be imposed in the event of a loss. The coinsurance penalty clause, which is built into most property insurance policies, states that you must insure the dwelling for at least 80% of the ITV. By insuring the building for anything less will cost you a lot of money in the long run. Here’s how it works. Let’s say you didn’t insure to 80% of ITV. And, let’s say you have a kitchen fire and there is $50,000 of damage to your home. When the insurance company pays you, they will divide the amount of insurance that you purchased ($300,000) by the amount you should have purchased (80% ITV is $480,000). The insurance carrier will then only pay 62.5% of the claim, or $31,250. That’s right…you have to pay $18,750 out of your own pocket.

Hopefully you now see the problem with those “Save Thousands On Your Insurance” flyers you get in the mail. It’s about more than your premium?you have to keep your ITV in mind. So, please speak to an independent insurance agent who focuses more on coverage and protection rather than simply price. You will be happy you did.

Today’s photo was generously shared by Sectionz via the Creative Common’s License. Thank you!