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In the property insurance market, the correct cost to insure your home or commercial building can be a figure that is very allusive to the property owner. What's important to remember is that the cost to replace it is not equivalent to its real estate value. What you may sell your home or building for in today's market could be less than the cost of what it would take to repair or replace it. 

So, what would happen if your property was only insured to the real estate or tax value? Or maybe only insured to the balance left on the mortgage? If you were only partially insuring your home or building, you could only receive a partial payment. To many insurance carriers, purchasing coverage for less than the replacement value of the property means that you have decided to "co-insure" your property. Many times, you would be stuck with a penalty called the co-insurance penalty if a claim was filed. The value would be determined at the time of loss and if the amount of insurance is found to be under the co-insurance percentage then a penalty would be applied to your final payment. The typical co-insurance clause requires you to insure your property to 80% of its value. 

Here's how it would work:

Let's assume you had a home that has a full replacement cost value of $150,000. It was written on a policy that has an 80% co-insurance clause. However, you feel like you could sell the property on the real estate market for only $100,000 and felt you should only insure it for that amount. If there was a hail loss on the property of say $30,000. To find the amount that the insurance company would be responsible for paying, the insurance company would divide the amount of insurance you purchased ($100,000) by the amount you should have purchased ($150,000), which would be 66%. Therefore, the insurance company would only pay 66% of the claim or $19,800... subject to your deductible. You would be responsible for your deductible and the additional amount. 

Insurance companies use a replacement cost calculator to appropriately determine coverage on your property. That's why it is important to work with your William Blount & Associates Advisor to come to the proper replacement cost value. Always inform your insurance Advisor of special features or higher end finishes of your home. Also inform them of updates, remodels, and additions that you do to your property.

Thank you for Frontline Insurance for some of the information provided
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NOTICE: This blog and website are made available by the publisher for educational and informational purposes only. It is not be used as a substitute for competent insurance, legal, or tax advice from a licensed professional in your state. By using this blog site you understand that there is no broker client relationship between you and the blog and website publisher.
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