When a storm finally passes, you breathe that sigh of relief. You are so glad it wasn’t you this time around.
But, what if it was?
No one can predict the damage that Mother Nature can sometimes cause. Each time a rough thunderstorm charges through or a snowstorm blasts its wrath, any property could be at risk for damage. That’s why we all have homeowner’s insurance, right?
To some extent, yes. Sensible insurance policies will go a long way to protecting your largest asset. But it’s important to be realistic and well-informed about how these policies actually work, these days. If you haven’t heard the term “Actual Cash Value,” it may be time for a quick lesson on the matter.
“Actual Cash Value” and Its Impact on Your Claim
I’ve shared on this blog before about the changing state of insurance in Minnesota:
- Homeowners’ Insurance Rates Are Rising: What Can You Do?
- Why Homeowners Insurance in Minnesota is Getting More Expensive
- Preparing for Severe Summer Weather in Minnesota
Here’s a quick summary: As policies have changed, you have new clauses in your policy that bring the letters A-C-V into your vocabulary. An “actual cash value” means that your insurance company may only provide you the ACV of your roof, for instance, and not the cost of replacement if you have a wind/hail claim.
That means that if a storm rips off the roof of your home, or causes a tree to crash into it, you may be left with a heftier portion of the bill than you thought.
With today’s ACV policies, the homeowner is left with far more of the out-of-pocket expense of a repair. Let’s use our example: a storm has crashed an entire tree into your living room. Now, you have far more than a “skylight” view, which you neither expected nor asked for in any way. It’s time to file a claim with your homeowners’ policy. What can you expect from your claim?
The bottom line is, your policy will pay… some. You will be left on the hook for more of the cost than you probably expected. Because here’s the reality: Policies renewed with an ACV also mean that mandatory deductibles for incidents such as wind or hail are now added.
Let’s say you have been insured on a 10-year-old roof on your $400,000 house. According to your policy, you will have a mandatory $5,000 wind/hail deductible. The average replacement cost for a standard roof is $20,000 to $45,000, depending on size and pitch.
So, let’s say that after a particularly devastating storm, you are looking at $20,000 to $45,000 to replace that entire roof. You might think you’re fine after you shell out the deductible right? Wrong! This policy may only pay 85% of the cost to install a new roof, and you’ll have to have that remaining cost plus the deductible.
Many homeowners are used to having a $1,000 deductible. But now, in addition to the heftier deductible of $5,000, you’re also going to have to pay out-of-pocket another $3,000 to $6,750 on average, and maybe even more. That’s a total cost of $8,000 to $11,750 – or more, depending on the cost of the roof. This is a bigger change than most homeowners think!
What can I do about the New ACV policies?
The first part of being prepared is to have a solid understanding of what is happening. We’ve sent out notices to inform our clients, but do people really know the details? Until you have a claim, you may not really appreciate the full picture.
Why is this happening across the industry? The bottom line is that insurance companies are losing money in Minnesota. They’ve found that they may be forced to replace a 20-year-old roof with a brand new one, and they don’t like the price tag any more than you would. This means we are all paying more for our policies, more for our deductibles, and more out-of-pocket if a claim is made.
While you cannot change the industry and its trends, you can prepare yourself with both knowledge and preparation. First of all, be sure you are only using your policy for the utmost in damages. You want to consider only the most catastrophic events when considering filing an actual claim. If you are facing a major financial loss, of course, reach out to your agent. That is what the policy is for, but do not file for every minor scratch, or you will be footing a far larger bill than you imagined.
Can I Prepare Myself for High-Cost Claims?
The good news is yes, you can prepare for the unknown. While we won’t know precisely when, or how, or how much such an emergency may cost, we can all prepare ourselves for the worst. Having a safety net of an emergency fund can go a long way not only to help with peace of mind, but also keep yourself financially secure, no matter what Mother Nature may bring.
My advice would first be to meet with your financial advising team. My wife, Gretchen Rehm, is a financial advisor and just so happens to share an office with my team and me. I would suggest saving for a goal of a $50,000 house maintenance fund, so you have the ability to fix unexpected damages as necessary. Saving money is the best way to prepare yourself for the worst-case scenario.
Call this your “self-insurance” fund. This is your safety net, built in to protect your large assets. While there is no additional policy you can buy to protect against these out-of-pocket costs, having your savings plan in place can go a long way toward preparing for the unexpected expenses that can arise.
This is the Unfortunate Reality of Today’s Insurance Market in Minnesota
It is not a pleasant state to be in, but today’s insurance industry has some stark realities. Insurance companies have found themselves in a non-profitable stance. To make changes and make money, they’ve enforced new standards, largely putting more of the “hit” on the homeowner.
If these drastic changes in policy do not work, many companies may actually leave the Minnesota market altogether. The fewer options there are in companies, the fewer choices you will have. Much like those experiencing the same in Florida, our area’s homeowners may soon find that deductibles have been pushed to the point of non-coverage in areas like siding and roofs. That would be even worse!
Today’s insurance company is happy to insure things that wear out over time. As homeowners, we are used to those things being vehicles, boats, and even “toys” for our outdoor adventures. But today, the insurance company considers things like a roof an item to wear out too, and this means they are less willing to take the “hit” on paying to replace it. Arm yourself with both knowledge and safety nets, and you’ll be far better off than the homeowner who doesn’t prepare!
If you’re feeling anxious about all of this, please don’t hesitate to give my office a call. We would be happy to go over your current policy or provide you with a quote on something new.
