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Guaranteed-replacement coverage fading fast

If your house was damaged or destroyed by fire or natural disaster, would your insurance cover the cost of rebuilding it?

Before you answer -- even if you see the word "replacement" in your policy, don't assume the insurance company will pay to replace everything and all your costs would be covered.

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Why not? Because the good, old-fashioned term "guaranteed replacement coverage" is quickly becoming a thing of the past. It used to be common for homeowner's policies to offer this coverage, which provided the peace of mind that your home would be protected regardless of rebuilding costs. If your policy was for $100,000, but it cost $200,000 to rebuild, the insurer would have covered it all.

But that was the 1980s. Today, policies usually specify coverage of what's called "replacement coverage" or "extended replacement coverage."

Most homeowner's policies use one of the following four terms in defining their coverage:

"Actual cash value" doesn't mean exactly what you may think. "Actual cash value is replacement cost minus depreciation," says Gary Julian, insurance specialist with the Texas Department of Insurance in Austin. So, with each passing year, the coverage amount typically declines. It's highly unlikely that a policy for actual cash value would even come close to covering the costs to rebuild your home.

"Replacement coverage" means the policy will cover the cost of rebuilding, up to the amount of the policy. So, if your policy is for $100,000, and you have a total loss, you'll get up to that much to rebuild -- and no more. Of course if you sustain a major, but not total loss -- if your roof came off and it will cost $20,000 to fix it -- you will be covered for that loss, less your deductible.

"Extended replacement coverage," sometimes known as "specified additional amount of insurance," means the company will cover the cost of rebuilding your house, up to a stated percentage over the amount for which it is insured. Usually, it's up to 20 percent or 30 percent above the face value of the insurance policy, says Joseph Annotti, vice president of public affairs with the National Association of Independent Insurers, Des Plaines, Ill. A few extended replacement-cost policies go up to about 80 percent over the value of the policy.

Again, on a home insured for $100,000 a total loss in this case would result in benefits up to $120,000 or $130,000.

Extended replacement coverage can help protect against short-term price fluctuations in building materials and labor that can occur after a catastrophe. It also provides some protection against skyrocketing costs due to tighter building codes or major disasters, like hurricanes and wildfires.

"It's not a guarantee, but it is a cushion," says Amy Bach, executive director with United Policyholders, a consumer advocacy group based in San Francisco.

"Guaranteed replacement coverage" means that in a total or near-total loss, the insurer will pay out the necessary amount to rebuild or restore the home, no matter what the cost -- not including such things as antique, hand-carved doors, for example.

In Florida, for instance, anecdotal evidence indicates that just such a post-disaster spike is occurring in the wake of Hurricanes Charley, Frances, Ivan and Jeanne, says William Stander, a Tallahassee, Fla.-based regional manager with Property Casualty Insurers Association of America. "Insurers are telling me that the cost to replace a roof is two to three times what it should be."

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-- Posted: Oct. 12, 2004





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