No matter what type of limits of liability are shown on your insurance policy’s declaration page, every homeowner will also contain a loss-settlement provision. This provision outlines how a claim will be paid subject to the various conditions of the policy itself. Generally, loss settlement applies to the replacement cost payment for both the dwelling and the personal property. The provision gives the insurance company the chance to delay full payment of a claim by paying only the actual cash value of the loss. In some instances, they can forego full payment altogether due to insufficient funds by the insured. Of course, this is all calculated by the loss settlement amount. What is the loss settlement amount?
Loss Settlement Amount – What Is It?
As mentioned above, nearly every homeowners policy has a loss settlement provision contingent on a loss settlement amount. The term loss settlement amount itself is used to denote the amount of a property in a given insurance settlement. The loss settlement depends mostly on the type of settlement option the policyholder agrees to when taking out their homeowners policy.
How Does The Loss Settlement Provision Work?
In the event of a homeowners insurance claim, the loss settlement amount is the dollar amount that the insurance company will payout to the homeowner. The amount is laid out in the loss settlement provision section of the policy. Generally, with homeowners insurance, the insured is required to carry coverage that can cover at least 80 percent of the total replacement value of a house. There are three key loss settlement options to keep in mind:
- Agreed value
- Actual cost value
- Replacement cost value
When it comes to high premiums, they are typically tied to the replacement cost value of a home rather than the cash value option. The agreed value option requires an appraiser to come in and help the homeowner and the insurer to agree on the value of the home or object. When calculating the loss settlement amount, the amount is generally less than the amount of full coverage if the 80 percent replacement cost coverage is not being met.
The major purpose of the loss settlement provision is to detail how a claim is going to be paid. The provision deals with replacement cost as well as payment for both the dwelling and the property itself. While the provision can be helpful, it can also grant the insurance company the option to delay a payment in full by only paying out the cash value of a loss.
Setting Good Homeowners Policy Limits
If you want to avoid a loss settlement provision, you’re going to want to set the correct policy limits. Coverage for replacement or repair of your home should always be calculated based on the exact square footage price, all while taking into consideration the size of the home, the quality of materials used, and any construction impediments.
Too often, homeowners do not take the quality of materials into mind when thinking about policy limits. For example, if you used marble flooring rather than travertine, that’s a cost that needs to be considered when setting coverage limits. The same goes for roofing, fixtures, and even countertops.
Another thing to keep in mind is construction impediments such as vegetation, neighbors, or environmental conditions. Is your house situated on a hillside? That’s going to make repairs more costly. Keep these things in mind when setting coverage limits and the loss settlement provision won’t be an issue.
You never want to be left high and dry paying for repairs or damages on your own, keep coverage amounts where they should be and know how to value your home at the appropriate amount.
