Replacement Value vs Market Vale

Residential Coverage Issues - Replacement Value vs. Market Value

Homeowners’ insurance policies often provide replacement cost coverage for the dwelling in the event of a loss. As such, insurance companies require policyholders to purchase an amount of insurance equal to the cost to rebuild the home using current construction costs. This is very different from the market value of the home. The market value of a home is the amount the home is worth if you were to sell it today. The two amounts can be very different.

During negative economic times replacement values may continue to increase based on construction costs, while market values are decreasing due to lower resale demand. Remember, if a home is insured for replacement value, the insurer must pay the cost to rebuild the home, (up to the policy limit), not what a willing buyer would have paid for it prior to the loss.

During positive economic times replacement values may be less than market values. Market values increase based on demand and availability, and market values also include the cost of the land under a home. During such times, a home may sell or be appraised for more than the amount of coverage an insurance company is willing to provide. Remember that insurance covers only the cost to rebuild the building and not the value of the land.

Most replacement cost policies require you to carry a certain percentage of the replacement value (normally 80%) at all times. If you fail to carry the correct amount of coverage, you may be responsible for a percentage of a partial loss. For instance, if you carried a $100,000.00 coverage limit when in fact the amount needed to meet the policy requirements is $200,000.00 and you have a partial loss of $50,000.00, the company would only pay $25,000.00 of the partial loss which is 50% of the claim.

The formula used in the example above is the amount of insurance carried divided by the amount of insurance needed, times the amount of loss, equals the amount payable for the claim by the insurance company.

Many insurance companies include a provision known as inflation guard in home insurance polices to ensure that insured values continue to correspond with the actual cost to rebuild a home. This provision helps prevent problems of homes being underinsured. If an insured has concerns about the amount their home is insured for, it is recommended they speak with their agent about completing a new replacement cost estimate for their home.

P & C General - Current Assessments and Recoupment Surcharges

Below you will find a brief description and the Statutory Authority of each charge other than the homeowners premium that is likely to appear on a consumer's premium billings. Please note that while most charges are on the H.O. policy, the CAT Fund Emergency Assessment is on all property lines except for Workers Compensation, Medical Malpractice, and Flood. This assessment also includes Surplus Lines.

Emergency Management Preparedness and Assistance Trust Fund

Description: Provides for emergency management preparedness, communication and training. Imposed on homeowners policies and commercial fire/multi peril and BOP.
Surcharge: $2 for homeowners. $4 for commercial. Statutory Authority: 252.372

Citizens

These two assessments are calculated on the windstorm portion of the premium with property insurers including Citizens and Excess & Surplus policyholders. (Personal and Commercial).

Regular Assessment

Description: Provides for deficits for Citizens ability to pay claims in any one year.
Assessment: Currently there are no regular assessments being charged to policies.

Emergency Assessment

Description: If a regular assessment is insufficient to cover the entire deficit for a particular year, Citizens can impose an emergency assessment. This Assessment can be adjusted as needed and may continue until the entire deficit is recouped.

Assessment: 1.4 percent. For all policies issued and renewed beginning July 1, 2007 and will continue until the entire deficit is recouped.

Florida Insurance Guaranty Association (FIGA)

This assessment will be applied to ”r;admitted” carriers on personal property, commercial property, and automobile policies. This assessment does not apply to Surplus Lines.

Description: Provides for the claims of Insolvent Insurers in any one year.
Assessment: 2 percent.
Statutory Authority: 631.57(3)(a)

Florida Hurricane Catastrophe Fund Emergency Assessment

This assessment applies to all Property & Casualty policies except, Workers Comp, Medical Malpractice, or National Flood Policies. Also, this assessment applies to Citizens and Excess & Surplus policyholders. F.S. 215.555 (6) (b).

Description: Provides for deficiencies in the Cat Fund.
Surcharge: 1 percent. Effective January 1, 2007 (for 6 years) and will continue for 12 months. Does not include Workers Compensation, Accident and Health, Medical Malpractice, and Flood. This assessment includes Surplus Lines.
Statutory Authority: 215.555(6)(b)3

Florida Hurricane Catastrophe Fund (FHCF Recoupment Surcharge)

Description: Fund deficiencies are recouped by a surcharge levied on insurance companies and recovered through their policyholders.
Surcharge: Varies by the company’s level of participation.
Statutory Authority: 215.555

Fire College Trust Fund

Description: Used for fire and hazardous waste cleanup training for fire departments. The surcharge is only for commercial insurers who provide fire coverage.
Surcharge: 0.1 percent.
Statutory Authority: 633.445

Premium Tax

Description: Insurers are required to collect a state tax for each policy the insurer writes.
Surcharge: 1.75 percent.
Statutory Authority: 624.509