Insurance companies normally use one of two methods to figure how
much you will be reimbursed for a loss if the amount is less than your
coverage limits.
The most common calculation is the actual cash value,
which is the
replacement value minus depreciation. For example, if the video camera you
bought for the birth of your child was stolen during his fifth birthday
party at an amusement park, the amount the insurance company would pay might
be fairly close to today's market value for a five-year old video
camera.
The second calculation is simply the replacement cost of
the lost property
with no depreciation, but usually with a maximum value. That means you would
be paid whatever it cost to replace your video camera with comparable model
at today's prices, up to a preset limit. This is far less common and unless
your policy specifically states it will pay the replacement value, it will
only pay actual cash value.
Coverage limits play a major role in what
you will be paid for a loss. The
value of your dwelling sets a baseline from which other coverage levels are
calculated. For example, compensation for additional structures on your land
might be limited to 10 percent of the value of the dwelling. Your personal
property might be limited to 50 percent of the dwelling value.
The
method of loss can have an impact on your compensation, as well. If a
valuable is stolen, you might receive less than if it was destroyed by fire.
Most policies will place lower dollar limits on compensation for certain
types of assets that are stolen, such as firearms or jewelry, to limit the
insurance company's potential exposure to common thefts. Such items are far
less likely to be destroyed than stolen, so insurers are more likely to
cover them for actual cash value in case of destruction. This also creates
an added incentive for the insured to protect assets from theft.
If
you have something of tremendous value and you know the regular limits of
your policy wouldn't come close to compensating you if it was lost or
destroyed, you may be able to purchase additional coverage through
endorsements and floaters, which are discussed in a separate
article.
© 2003 Emerald Publications
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