While your homeowner’s insurance policy is designed to pay you the necessary amounts to put your home back together after a loss, you may be surprised to find that getting a reimbursement may not be that simple.
After a covered loss, many policyholders decide to modernize certain parts of their home and upgrade some (or all) rooms during the repair or rebuilding process. Upgrades can range from installing higher-grade appliances to full-scale, floor-to-ceiling renovations. Other policyholders may choose (or be forced) to downgrade certain areas, either due to a lack of funds or the need to spend funds elsewhere. Both of these choices can have an effect on the overall claim payment you ultimately receive from the insurance company.
Which provision addresses upgrades and downgrades?
Your policy most likely will not have a policy provision titled, “upgrades and downgrades.” In our example policy below, the relevant provision is found under “Building Structure Reimbursement.” Initial claim payments are typically paid on an Actual Cash Value (“ACV”) basis until you complete the repairs. Once the insurance company verifies the completed repairs, a policyholder can then be eligible to recover the difference between the ACV and the amounts actually spent through a reimbursement claim.
In this sample policy, the amount of reimbursement is determined by the following provision:
Building Structure Reimbursement will not exceed the smallest of the following amounts:
- (a) the replacement cost of the part(s) of the building structure(s) with equivalent construction for similar use on the same premises;
- (b) the amount actually and necessarily spent to repair or replace the damaged building structure(s) with equivalent construction for similar use on the same residence premises; or
- (c) the limit of liability applicable to the building structure(s) as shown on the Policy Declarations for Coverage A Dwelling Protection or Coverage B Other Structures Protection, regardless of the number of building structures and structures other than building structures involved in the loss.
Let’s break this provision down.
The above provision lets the insurance company reimburse you only for the lowest of these three amounts. Your reimbursement claim will always be the lowest of these three amounts:
- (a) The first option represents the cost for you to repair or replace the damaged item with an identical item at today’s costs. This is an estimated cost.
- (b) The second option represents the exact amount you actually paid to repair or replace the damage.
- (c) The third option represents the full amount of your policy (policy limits), and will only apply when the covered damage equals or exceeds the full value of your policy. If the covered damage does not reach the policy limit, the insurer will choose the lesser between (1) and (2).
The effects of upgrading your home
If you make an upgrade, such as granite countertops in place of damaged Formica® countertops, the insurance company will likely invoke Option (a). By invoking Option (a), the insurance company can ignore the higher price you actually paid to make the upgrade, and only reimburse you for the cost you would have spent to replace the damaged item with something of equivalent value under Option (a). So if you make an upgrade, do not expect the insurance company to pay you in full for that upgrade – You will only be eligible for reimbursement up to the value of the damaged item at the time of loss.
What happens when you downgrade your home
If you make a downgrade, the insurance company will likely invoke Option (b). By invoking Option (b), the insurance company will actually pay you less than if you had replaced the item with something of equal quality. Even though the item you replaced is of lower quality, the insurance company will say that the lower quality item is “for similar use,” as stated in the policy. Thus, they will choose to pay you that lesser amount under Option (b).
These are just a few points for you to keep in your mind when deciding how to put your house back together after a covered loss. If you have any questions with how upgrades and downgrades can influence your homeowner’s insurance policy, please call Pandit Law Firm for a claim review.