You Can Be Penalized For Not Having Enough Insurance
If your home was damaged in the West Fertilizer Plant Explosion or suffered a major fire or storm damage, you may find out a very painful and unfair Penalty may apply to you. Let's say your house was completely destroyed in the West Fertilizer Plant Explosion and you find your insurance policy. It says you have $100,000 limits for damage to your property. You naturally believe you are going to get a check for $100,000, but instead, when the adjustor hands you your check, you only get a check for $66,666.00. You ask what gives?
?Insurance to Value?
Insurance to Value is a doctrine in most home insurance policies that states you must insure your home to a specified percentage of the value of the home. This requirement is normally 80%-100% of the cost to replace or rebuild the property (not the market value). If the Insurance to Value requirement is not met, you are considered ?underinsured? and can be penalized when a property claim is filed. The penalty is calculated using the formula below.
Insurance Carried on Property
????????????? X Damage Amount = Amount Paid by Insurance
Insurance Required on Property
Let?s revisit our example to see why the Insurance to Value provision caused the insurance company to pay 1/3rd less than the $100,000 limits. ?Insurance Carried? on your home insurance policy was $100,000 but the ?Insurance Required?, based on your 100% Insurance to Value provision, is $150,000. Thus, you are underinsured by $50,000 or 1/3rd of the value and your $100,000 of fire damage is only covered for $66,666.