Insurance policies can seem very difficult to understand. However by applying Logic & Reason to these policies they start to make sense. This is not to say insurance companies don’t draft policies that favor them, but there is a reason for the key provisions in these policies. This article discusses how to understand insurance policies, and more specifically homeowner's insurance policies in Florida.
WHAT IS AN INSURANCE POLICIES
To understand what a homeowner's insurance policy is it can be helpful to understand what it is not. An insurance policy is not a warranty or a maintenance plan. An insurance policy is to protect the homeowner from an unforeseen damage to the home by putting the homeowner back into the same position they were in prior to the loss. Court’s will usually apply a substantially similar standard when determining if the insured was restored to their pre-loss condition.
It makes sense that an insurance policy is not a maintenance plan. Maintenance to the home is not something that is unforeseen, but it is something that is routine. It also makes sense that an insurance policy is not a warranty. A warranty is where the producer/seller of a product guarantees the quality of the product. When the insurance company insures a home they are no guaranteeing the quality of the home.
REPLACEMENT COST VALUE VERSUS ACTUAL CASH VALUE
Replacement Cost Value (RCV): RCV is the amount of money necessary to restore the insured’s physical property to its pre-loss condition. With RCV the insurance company cannot restore the insured’s property to a worse position than it was in before the loss. This means if the insurance company cannot restore the insured’s property to its pre-loss condition they may have to put the insured in a better position.
Actual Cash Value (ACV): ACV is the amount of money necessary to restore the insured back to their pre-loss condition financially. This is generally the lower of the cost to repair the damage to the property, or the fair market value of the damaged property minus the depreciation.
LITIGATING ROOF CLAIMS
Roof claims are one of the most litigated issues with homeowner's insurance policies, and they provide a good example in understanding these policies.
If a storm damages a roof, one of the questions that arises is whether or not the roof can be repaired. If the insurance company is claiming the roof can be repaired then they will need to repair the roof to its pre-loss condition. If they cannot repair the roof to the pre-loss condition the insurance company will have to payout the claim based on a roof replacement.
If the roof needs to be replaced the question becomes whether or not to give the homeowner the ACV value of the roof or the RCV value. The insured is entitled to RCV value under most policies.
RCV POLICIES: Most policies are replacement policies, but these policies will usually only pay the ACV value until the repairs have been completed. After the repairs have been completed they will pay the RCV value. This may seem strange at first, but if we look at the purpose of insurance policies it starts to make sense. The purpose of insurance policies is to put the insured back in their pre-loss condition. Before they make the repair ACV will restore the homeowners to their pre-loss condition financially. If the roof needs to be replaced, after the replacement is made then the additional money is necessary to restore the insured physically to their pre-loss condition. If the roof replacement is never made then the homeowner is restored to their pre-loss position upon receiving ACV.
ACV POLICIES: ACV policies are more straightforward. ACV policies are less popular, and they are usually used for investment property. The reason ACV policies are more popular with investment property is because people who own investment properties are usually more concerned about a financial loss. Therefore in theory an ACV policy will achieve this goal by giving the insured the amount of money they loss due the unforeseen event. While the ACV value of a roof that needs to be replaced is only the value of the roof minus the depreciation. After the insured receives the ACV value of the roof, they will have been in the same financial position as they were in before the loss.
ORDINANCE AND LAW APPLIED TO ROOFS: If you have to replace a roof sometimes new laws are passed requiring the insured to put on a more expensive roof to comply with the new law. An RCV policy insures against this additional cost. This is the logical interpretation of the policy, because the point of homeowners insurance is to restore your property to its physical pre-loss condition without the insured having to pay more than the deductible. Therefore having the insurance company pay the additional cost to comply with the new laws is the only way to achieve the purpose of the policy.
CONSUMER PROTECTION
As stated above insurance companies will often try to draft insurance policies that favor them. Fortunately there are some consumer protection laws out there to prevent these policies from favoring the insurance companies too much. In Florida some of the key coverage provisions in homeowner's insurance policies mandate the insured sign a separate form opting out of these coverage areas. These coverage provisions make up the most important coverage areas for buying homeowners insurance, and this procedure makes sure the insured knows these coverage areas do not apply to the policy they are buying. If the insured does not sign a separate form opting out of certain coverage area they could be covered under the policy despite what the policy says.
CONCLUSION
When initially looking at an insurance policy they can appear almost impossible to understand, and do not make a lot of sense. However if you understand the purpose behind the policy you can understand the key provisions, and make sense of the policy. The insured should still be careful when reviewing these policies, as insurance companies will change provisions in the policy to benefit them. They can even make changes to the policy when its renewed by sending them the new policy, but not verbally informing them of the changes.
