The recent spike in inflation has substantially increased the daily cost of living for all Floridians. Everyday goods such as food and fuel now cost more, and it is having a noticeable impact on household finances. At some point, the question then arises as to how this inflation effects your property insurance coverage.
Your insurance company’s obligation to compensate you after a loss is limited to the coverage limits set forth in your policy. For instance, if your Coverage A Limits – which protect your main structure – are $200,000.00, then the maximum amount your insurance company will pay you is $200,000.00. The coverage amounts in your policy were – at least conceptionally – based on an estimate of what it would cost to totally rebuild or repair your home. But what if, now that rampant inflation has kicked in, the cost of rebuilding your structure is higher than the coverage limits on your policy?
INFLATION GUARD COVERAGE
Most insurers provide what is commonly referred to as Inflation Guard insurance – either as an endorsement or part of the main policy. In essence, Inflation Guard will automatically increase your policy coverage limits every year in an effort to keep up with the rising cost of construction. These inflation adjustments are usually between 2% and 4% annually.
Of course, your insurance company will raise your insurance premiums to reflect these higher coverage limits, but not always at the same percentage. For instance, in a recent rate filing, a Florida insurance company reported available inflation protection coverage increases of 4%, 6% or 8% , but that premiums would only go up by 2%, 3% and 4%, respectively.
Although Inflation Guard protection is nice, sometimes repair costs can rise suddenly and without warning – like after a hurricane or other major event. Some property insurance companies offer additional coverages to make sure you are protected from these sudden spikes in repair costs. This additional coverages usually come in the form of either Extended Replacement Coverage or as Guaranteed Replacement Cost Coverage. Although these two coverages are similar, there are important differences.
EXTENDED REPLACEMENT COST COVERAGE
Extended Replacement Coverage is an endorsement which will add a certain percentage to your stated dwelling coverage if your coverage limits turn out to be insufficient. Typically this Extended Replacement Coverage would be an additional 25% over the Coverage A limits of your policy. For example, if Coverage A on your policy was $100,000.00, and the total cost to repair your home turned out to be $117,000.00, this Extended Replacement Coverage would then cover the additional $17,000.00 necessary to repair your home. If the repair of your home ended up costing $130,000.00, your Extended Replacement Coverage would supply an additional $25,000.00 (25% of your Coverage A limits) towards your damage. Unfortunately, you would then still be responsible for the remaining $5,000.00 cost of repair.
GUARANTEED REPLACEMENT COST COVERAGE
Guaranteed Replacement Cost Coverage is much more comprehensive and would provide coverage for whatever it took to repair your home. Using the above example, if the repair cost was $130,000.00, Guaranteed Replacement Cost Coverage would pay for the full amount of the repair – even though the Coverage A limits on the subject policy were only $100,000.00.
Although Extended Replacement Coverage and Guaranteed Replacement Cost Coverage sound enticing, not all insurance carriers provide such endorsements. Furthermore, such coverages are very expensive and not all homes qualify.
The best way to protect against being underinsured is to consistently check the coverage limits of your property insurance policy. You should make a habit of always reviewing your coverage upon the policy renewal. It is also a good idea to revisit your policy limits any time you feel the cost of rebuilding your home has increased to the point that your current limits may no longer be sufficient.