An often-ignored feature of both homeowners and renters insurance policies is personal property coverage. That's unfortunate, because if a claim is filed, policyholders might be surprised at the response they get from their insurance carrier.
Personal property is one of several different types of coverage offered within a homeowners insurance policy. This insurance pays for the items in the home that are not "permanently" attached to the structure itself. This includes furniture, clothing, as well as household appliances such as refrigerators, washing machines, and clothes driers.
Most homeowners policies will automatically cover personal property, depending on the carrier, up to 40% of the amount of insurance on the home itself. For example, if the structure is insured for $200,000, the personal property, or contents of the home, is insured for $80,000. That may sound like a lot of money, but there are several things to watch out for too.
Perhaps the single most important aspect of personal property insurance has to do with actual cash value versus replacement costs. The best way to explain this concept is to use an example.
Let's say that Ann's refrigerator cost her $800 five years ago when it was brand new. Because that refrigerator has been used for five years, it's no longer worth $800; some of its useful life has been consumed, so it has depreciated in value. Let's also assume the average refrigerator lasts for ten years. This means the actual cash value might be around $800 x (5 years / 10 years), or half its useful life. This works out to $400.
If the insurance policy covers personal property at actual cash value and the unit was damaged, the policyholder would be reimbursed $400 for a refrigerator that might cost closer to $1,200 to replace. That's where the concept of replacement cost comes from. If the terms on the insurance policy include replacement cost, the insurance carrier will pay the policyholder $1,200, not $400.
Replacement cost is usually available as an endorsement to personal property insurance. There is a cost for this added coverage, but the additional premium is well worth the cost if a claim is ever filed.
Even if a replacement cost rider or endorsement is purchased, there may be some items that are not covered under personal property. Items not eligible for replacement cost generally fall into one of two categories:
In addition to the items not eligible for replacement, there may be items in the home that are covered by replacement costs only if these are specifically identified in a separate endorsement. For example, personal property insurance may limit the claim on jewelry unless the item has been specifically identified, and its value professionally appraised.
For many married couples, this limit might apply to something like a diamond engagement ring, which might be worth considerably more than the jewelry limit specified under the personal property section of a homeowners insurance policy. Unless the ring is appraised, and specifically identified on a scheduled personal property endorsement, the policyholder may not be paid the full replacement cost of the ring.
This same limit can apply to other items of value such as fur coats, cameras, musical instruments, silverware, and even golfing equipment.
Earlier we mentioned that many insurance companies use a value of around 40% as an estimate of the replacement cost of the personal property in a home. There is no doubt this figure was based on a study conducted many years ago, and there's also no doubt that the 40% figure doesn't work for everyone.
It's possible to purchase additional personal property insurance, but there should be a good basis for its value. Attached is a simple Personal Property Worksheet which can accommodate up to 500 items found in a home.
Completing this home inventory is one of the best ways to develop an accurate estimate. The inventory can also be useful when submitting insurance claims.
Finally, here are some tips to help with the inventory of personal property:
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