27 March 2013
Unnecessary Cost of Replacement Value Insurance
Homeowners are often forced, by their mortgage banks, to insure their homes against total loss evaluated at the replacement cost of the property. The reasons for this requirement may be a combination of factors, including the value placed on the home by the mortgagor so that it can recover its own loss, the higher premiums paid by the homeowner on an expensive policy issued by the insurer, and the evaluation of the assets held by the homeowner which can be dominated by the value of a residence that was built with high standards of craftsmanship in an earlier era.
What is the homeowner really insuring? It may be that he owns the home outright, in which case there is no mortgage. Then the insurance company is protecting the homeowner for the possibility that he will lose whatever value he places on his residence, whether or not it is the identical replacement of the structure and all its features. He may wish to protect himself only against the loss of a suitable place to live, regardless of the unique characteristics of his current home.
Of course, third parties may also have an interest in how a totally destroyed home is replaced. Its substitution with a less-expensive though perfectly livable house may reduce the value of surrounding properties. The requirement identically to replace a damaged home will affect its purchase price should that be a matter of law.
There clearly are a variety of considerations that have to be taken into account when acquiring a home beyond just putting a roof over one’s head. Good citizenship can be expensive, and cash flow is not the only factor determining fairness of insurance rules and regulations to the interests of the homeowner. The revenue stream earned by insurance companies may finance, however, their considerable lobbying efforts and political contributions to supportive legislators in state governments.
Homeowners are often forced, by their mortgage banks, to insure their homes against total loss evaluated at the replacement cost of the property. The reasons for this requirement may be a combination of factors, including the value placed on the home by the mortgagor so that it can recover its own loss, the higher premiums paid by the homeowner on an expensive policy issued by the insurer, and the evaluation of the assets held by the homeowner which can be dominated by the value of a residence that was built with high standards of craftsmanship in an earlier era.
What is the homeowner really insuring? It may be that he owns the home outright, in which case there is no mortgage. Then the insurance company is protecting the homeowner for the possibility that he will lose whatever value he places on his residence, whether or not it is the identical replacement of the structure and all its features. He may wish to protect himself only against the loss of a suitable place to live, regardless of the unique characteristics of his current home.
Of course, third parties may also have an interest in how a totally destroyed home is replaced. Its substitution with a less-expensive though perfectly livable house may reduce the value of surrounding properties. The requirement identically to replace a damaged home will affect its purchase price should that be a matter of law.
There clearly are a variety of considerations that have to be taken into account when acquiring a home beyond just putting a roof over one’s head. Good citizenship can be expensive, and cash flow is not the only factor determining fairness of insurance rules and regulations to the interests of the homeowner. The revenue stream earned by insurance companies may finance, however, their considerable lobbying efforts and political contributions to supportive legislators in state governments.
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