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  Why is the Dwelling Coverage amount so high for your home or real estate investment?  I get this question every time I quote for insurance coverage.  The answer is based upon an insurance term: Replacement Cost (RC).  Replacement Cost is what the insurance carriers have calculated to be the cost to "replace and/or rebuild" your property to the exact specs, within local code guidelines, to what it was before the total loss.  How the carriers and their affiliated software that calculates these costs come up with such high figures is often explained in relation to "catastrophic" losses that have not only affected your property but your neighbors, i.e. Tornado, Hurricane, etc in which the costs of goods and service, based on rudimentary supply and demand, would incur exponential cost increases.

In today's Real Estate market in which home/property values have dropped dramatically, the calculated "Replacement Costs" have not.  After all, just because the value of a particular good has been devalued does not mean that the overall economy is not incurring "inflationary" trends.  Look at the cost of milk; it didn't go down with the value of your property.  Nonetheless, insured's now find themselves paying for insurance coverage that often exceeds the value of their homes and/or investments.

So what can you do to lower the cost of insurance while maintaining an appropriate level of insurance coverage?

For Homeowners they haven't a choice if they want to be insured by a major insurance carrier.  The penalties for not insuring at Replacement Cost on a Homeowner policy will make all those premiums paid to the insurance company with nothing to show even more futile should you have to make a claim.  The good news is that it is such a highly competitive market place that in spite of the enormous amount of coverage relative to the market value insured's are getting more bang for their buck.

Now for my Real Estate Investors:  You have choices and it's important to understand what they are and their associated impact.

Here are your choices:

1. Replacement Cost- What "the Insurance companies believe" it would cost to replace property in its entirety at today's prices
2. Actual Cash Value- A depreciated value based upon the Replacement Cost
3. Agreed Value- True "Fair Market Value"

I've just explained what Replacement Cost is essentially.  But Actual Cash Value is a bit of a misnomer.  In insurance lexicon Actual Cash Value is really a depreciated figure based upon Replacement Cost.  What make Actual Cash Value lower is that it is often based on the "age" of the structure/property and the depreciated aspects of the building materials associated with older buildings.  What Actual Cash Value is NOT is a relative term to Fair Market Value.

If you wish to insure for Fair Market Value you must accept a policy written at Agreed Value.  Not all carriers will allow for such coverage, especially if there is a large disparity between Replacement Cost and Agreed Value/Fair Market Value.  Fortunately for Real Estate Investors in Ohio T.A. Swain has access to companies that will insure at Agreed Value with Actual Cash Value and even Full Replacement Cost Value to your claim; up to the Agreed Value (Level) of coverage accepted on your insurance policy less your deductible.
Posted 8:50 AM  View Comments

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