Protecting your home: Understanding replacement cost and value at the time of loss
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When you purchase home insurance, you need to choose the basic and supplementary coverage that meets your needs. And you also need to understand which risks are covered in each case. If your home or property is damaged due to a covered risk, such as a fire, your insurer will pay out according to the settlement terms in your insurance policy. In general, there are two settlement options available in the event of a disaster: replacement cost or value at the time of loss.
Replacement cost: to replace your personal property or rebuild without taking depreciation into account
Replacement cost means that your insurer will pay what it costs on the day of the disaster to rebuild or repair (whichever is less) your buildings or personal property, regardless of depreciation. But to qualify for this type of settlement, you must comply with certain conditions set out in the insurance policy, including the obligation to replace the property or to rebuild at the same location. This settlement arrangement lets you buy new things to replace your possessions or rebuild with new materials without having an amount for depreciation applied to your insurance claim. That can be a wise move, especially at a time when the prices of building materials keep rising.
With Promutuel Insurance, if you comply with the conditions set out in your policy, you will be compensated for replacement cost. You’ll be able to replace your personal property and furniture or rebuild your home without being penalized for loss in value over time. However, if you do not meet the conditions for replacement cost, you’ll be compensated according to the value at the time of loss. Let’s take the example of an insured who has a television that he decides not to replace following a disaster. Since he does not meet the conditions for replacement cost, he will be compensated for the value of the TV at the time of loss. These are the two settlement options included in your policy.
Value at the time of loss: adjusted compensation
Value at the time of loss means that the insurer will compensate you based on the value of the property on the day of the loss, and an amount for depreciation over time will be deducted. With this type of settlement, compensation is based on the replacement or reconstruction cost minus an amount for depreciation. In other words, you will receive a lower payout that takes into account the condition of your property prior to the disaster, its resale value, and its lifespan.
Usually, the compensation paid for rebuilding your home or replacing your property does not exceed the insurance amount specified in your policy. In order to fully protect your home and property in the event of a disaster, you need to determine the value. Note that rebuild value is the cost of rebuilding your home if it were completely destroyed, not the purchase price or the municipal assessment. You can consult a professional appraisal for clarification. Be sure to keep this value up to date and notify your insurer of any changes that would require adjustments to your insurance policy, such as renovations or repairs to your home that could affect the rebuilding cost.
Keep your receipts!
It’s important to keep proof of purchase for the belongings in your home. In the event of a disaster, you can use that information to prove what you own and how much you paid. Keeping records, and receipts in particular, will make it much easier if you have to file a claim with your insurer.
While a receipt is the best way to verify personal property ownership, there are other documents you can submit to your insurer for the same purpose. If you don’t have a receipt, your claims adjuster will tell you what else you can use. We also strongly recommend creating an inventory of what you own in each room of your house, together with photographs. Keep your inventory, photographs, and proof of purchase in a secure location protected from the elements, such as in the cloud, and update them when you renew your policy or acquire something new.
Key concepts
When we talk about claim settlement, terms such as replacement cost and value at the time of loss are included in home insurance policies and are not options you can choose when you purchase insurance. You need to understand these terms in order to anticipate how much you’ll receive in the event of a loss.
If you as the insured do not meet the conditions for replacement cost, you’ll be compensated on the basis of value at the time of loss. This means that compensation will take depreciation into account, so you might receive a lower amount.
Home insurance: make sure you’re covered
Many homeowners have questions about what their home insurance policy says. What types of coverage are included? What are the deductibles? What risks are covered? Here are some tips to guide you:
- Check your insurance policy: Take the time to fully understand the limitations and exclusions in your home insurance policy. Most insurers, like Promutuel Insurance with our secure Client Space, provide access to your policy online in just a few clicks.
- Update your insurance amount when you do renovations: Have you done improvements such as a kitchen remodel, a new garage, or a finished basement? Be sure to tell your insurer so they can update your policy accordingly. Renovations like these can affect the rebuild value of your home. Before undertaking any major renovations, contact your insurer to find out if you’ll need to make any changes to your coverage.
- Contact a damage insurance representative: They can assess your needs and recommend the best coverage to protect your home in the event of a disaster.
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