100% Replacement Cost, Really?

July 06, 2016

Weston Wolfe

Categories: Insurance

Roof Damage

Have you noticed lately that cartons of ice cream or frozen yogurt have gotten a little smaller? This is a marketing trick that many manufacturers are using to help keep the retail prices down. Give them less for the same price, who’s the wiser? You may be interested to know that many insurance companies are using the same method to keep their rates competitive and affordable. This little-known stunt is becoming especially popular in coastal states because of the exposure to windstorms. You will also find it getting popular in areas that suffer severe hailstorms. The insurance companies are actually using two different (and sometimes combined) methods for reducing their risk.

Wind & Hail Deductibles

In areas where severe windstorms and hail are the norms, you will most likely be presented with a higher deductible for these perils. This is usually listed on your policy as a percentage of the dwelling coverage. For example, having a 1% deductible seems negligent at first, but if the dwelling amount is $350,000, that will translate to a $3,500 deductible on your wind or hail claim. That is a substantial out of pocket burden to carry and remember, your deductible will be subtracted as well. The percentage deductibles are not always conspicuous on the quote or application, so make certain you ask your agent or broker to verify.

Roof Surface Endorsement

The Roof Surface Endorsement started showing up in 2012. A few of the major insurance companies are placing an endorsement (coverage change) on their policies that reduce the valuation of a wind or hail claim on the roof surface by using a depreciation scale. If for example, your 12-year-old roof needs replacing after a wind or hail storm, the insurance company is going to pay the value of a 12-year-old roof, not a new roof. This is referred to as “actual cash value” and could leave you paying thousands of dollars to have your roof replaced. And remember, that 1 or 2% deductible comes right off the top before they depreciate the value of your roof.

This is when you need to depend on an experienced agent to look out for your best interests. Value represents more than just affordable pricing; it also represents sufficient coverage for the price you pay.

So far, lenders appear to be silent on the issue. They are lending money on a very expensive asset that is not being insured at 100% replacement cost. Although in most cases if the home were a total loss, the company would pay the policy limit, if the loss only requires all or part of the roof to be replaced, not every carrier is offering 100% replacement coverage.