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Factors That Affect House Fire Insurance Payouts

If you have suffered a house fire there are several factors that could affect the size of the payout you receive from your insurance company.

For instance, the cause of the fire can be an important factor as well as how much damage was sustained in the fire.

One of the biggest factors affecting house fire insurance payments though is whether you have replacement cost coverage or actual cash value coverage.

Actual Cash Value Coverage Versus Replacement Cost Coverage

People looking to purchase homeowner insurance must understand the distinction between replacement cost and actual cash value policies.

These two phrases represent the two main alternatives for homeowner insurance.

Realizing that when a person purchases a house insurance policy, they generally want to pay the least amount of money in premiums while receiving the most coverage in the event of an insured loss …

Here is what you need to know about these two types of coverage.

Replacement Cost Coverage

This type of policy rewards a claim amount that is sufficient to replace whatever is lost or damaged at today’s prices.

Because this type of policy brings the homeowner’s living conditions the closest to what they were before the fire, it is more widely used than actual cash value coverage.

With a replacement cost policy, the insurance company gives the policyholder cash to replace the damaged items with new ones at market rates.

Claims under a replacement cost policy may occasionally be paid in two installments.

The insurer covers the real cash value of the replacements or a portion of the replacement cost in the initial installment.

Then in the second installment, the insurer will cover the remaining expenses once the repairs have been finished and the insurer has received proof of the repairs.

How Replacement Cost Policies Work

For homes, the replacement cost coverage option insures up to the cost of building a comparable structure, and for personal items, it insures up to the cost of purchasing the same item. The value of the land is not included in the replacement cost policy because the owner will not have to buy it again.

A good idea before you get this type of policy is to hire an appraiser to determine the worth of the covered home and/or personal property.

They can estimate the value of one-of-a-kind or priceless goods such as fine art, entertainment equipment, jewelry, and more, as well as the cost of the granite, wood, cement, glass, and other building materials that would be needed to rebuild a similar house.

One more thing to note with replacement cost policies is that in order to be eligible for replacement cost reimbursement, some items in the insured property may need to meet specific requirements.

For instance, some built-in appliances, like a dishwasher or freezer, may have a lifespan that, if exceeded, precludes replacement.

Additionally, the insurance company may decide not to pay for roofing repair expenses if the roof exhibits obvious symptoms of wear and tear.

Also, another example, is personal items that aren’t specifically listed under a scheduled personal property endorsement, like pricey works of art and intricately crafted artifacts, might only be covered up to a particular amount.

Actual Cash Value Coverage

The other common type of home insurance coverage is called Actual Cash Value, or ACV.

ACV refers to the market value of a good or a piece of property, or the original worth of a residence once depreciation costs are taken into account.

Home appraisers typically calculate this amount by subtracting the depreciation expense from the item’s or house’s replacement cost.

Because this type of policy reduces the amount the homeowners receives from a claim compared to replacement cost coverage, it comes with rates that are much cheaper.

In fact, the cheapest homeowner insurance policy to purchase is one based on real cash value.

This coverage only reimburses you for the item’s worth as it is being sold on the open market. That means the policyholder won’t be able to buy the same item without paying additional out-of-pocket costs.

How Actual Cash Value Policies Work

The item’s initial purchase price or its worth in the current market, less the depreciation charges for the wear and tear during the ownership period, is used to calculate the item’s actual cash value.

In the event that an insured loss occurs, policyholders get depreciated claim payments for covered objects including electronics, furniture, and other items.

Depreciation cost is figured based on the expected asset lifetime less the percentage of value lost each year since the asset was purchased.

The Bottom Line Between Actual Cash Value & Replacement Cost Policies

When a covered event causes a loss for a policyholder, the real cash value may lead to payouts that are less than what the replacement cost policy would produce.

That’s because the depreciation expenses from wear and tear are factored into the real cash value payout.

The tradeoff for these lower settlement claims is that you pay less in monthly premiums for this type of policy. So if you are cash-strapped and want to keep your premiums as low as possible this type of policy may make sense for you.

The low payouts are a tradeoff for the low premiums.

On the other hand, a replacement cost policy will allow the policyholder to start over and rebuild the house using today’s labor and material costs.

The policyholder will also get payment for any personal property lost or damaged as part of the insured loss, and the covered items will be replaced with equivalent goods at the going rate in the area.

This type of policy also protects against rises in material and labor costs as time passes. But in exchange for those bigger potential payouts, this type of policy requires higher premium payments.

Sell Your Fire-Damaged House

If you recently suffered a house fire and don’t want to go through a long, stressful repair process, you can sell your house as-is to We Buy Fire Damaged Houses.

We pay all cash so that you can get your money fast, combine it with your insurance settlement, and buy an even better house than before this ordeal occurred.

Fill out the form below to learn more.


Photo by Dave Hoefler on Unsplash


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