Everyone notices their insurance rate when it increases, and just about every policyholder in Florida will see their rate go up this year. But - not everyone notices a change in their insurance policy language. If you own a rental home and it’s at, or over, 30 years of age, than your insurance policy could come paired with severe limitations in how it responds in the event of a covered claim. And if it doesn’t now, then it might the next time you're offered a renewal.
When you own a rental home, it is a common practice to insure this under one stand-alone policy known in the insurance industry as a ‘Dwelling Fire 3’ policy, aka a DP3 policy. This type of policy is intended to cover the home in the same fashion as a homeowners (aka an HO3) policy would – but since it doesn’t qualify for a homeowners policy as a "rental", it must be insured differently - hence when a ‘Dwelling Fire 3’ policy comes into play. An HO3 insurance policy requires the home be owner-occupied while a DP3 insurance policy allows you to rent the home out to others rather than occupying it yourself.
One desirable feature of these types of insurance policies is that they typically settle covered claims for the dwelling based on its Replacement Cost – meaning the policy pays to make repairs, or provide replacement without deducting for depreciation, up to the selected policy limits. Without this ‘perk’, a covered insurance claim is settled based on its Actual Cash Value – which essentially means the insurance carrier adds in a deduction for “depreciation” (i.e. age, wear, and tear). Unfortunately, not every insurance carrier provides the Replacement Cost coverage benefit within their DP3 policy.
A handful of carriers are now implementing a “30 year” rule – meaning once the home reaches 30 years of age, their DP3 policy provides coverage to the dwelling based on “Actual Cash Value” instead of “Replacement Cost”. If your home was 29 years old last year, and is 30 years old now, your next insurance renewal offer may contain a “Notice of Policy Changes” informing you of this loss in coverage. Two insurance carriers we know of who are currently implementing these restrictions are FedNat Insurance Company (aka Federated National Insurance Company) and American Traditions Insurance Company.
So - when this change happens to you and your insurance policy what does it mean? Well, it means (1) your coverage is far less than what it was before, (2) your current policy is likely now including too high of an insurance limit (and that means you’re overpaying), and (3) you should start shopping for alternative rental home insurance quotes and consider options that include replacement cost coverage.
When based on Actual Cash Value, claims could be settled for far less than the amount it costs to fully complete the necessary repairs or replacement of the home. This is because in addition to the deductible, your claim settlement amount will include a deduction for “depreciation”.
Example 1 – Bill owns a rental home with a 16 year old shingle roof. A major storm comes through and tears off a portion of the roof warranting the roof unusable and unsalvageable – it needs to be replaced at a cost of $14,000.
With replacement cost coverage, the claim will be settled for the full $14,000, minus the applicable deductible.
With Actual Cash Value coverage, the claim is settled for far less – a 16 year old shingle roof has reached half it’s normal expected useful life, so this claim will likely be settled around $7,000, minus the applicable deductible.
Example 2 – Rosie owns a rental home that is 31 years old. She has had her insurance policy for several years now with the same carrier and she just renewed it again 2 weeks ago. The electrical panel malfunctioned yesterday causing the home to catch on fire. The home is deemed a total loss. She has the home insured for a value of $210,000 because that is what the estimated cost to repair or replace a home of her type and in her neighborhood is. She missed the notice in her insurance renewal packet that stated the dwelling is now covered based on Actual Cash Value instead of Replacement Cost.
This means instead of receiving a claim settlement for it’s replacement cost of $210,000 minus the applicable deductible, it will be settled for much less. The home comes in with estimated actual cash value of $168,000 and therefor the claim settlement is based on this amount minus her deductible.
As you can see, not only was Rosie arguably short-changed on her claim, but her insurance renewal was likely overpriced when factoring in the reduced coverage now being afforded to her. If she can’t collect the full $210,000 in the event of a covered claim, then her rate shouldn’t be based on that amount - it should be based on $168,000.
Not all rental home insurance quotes and policies are created equal, and that means not every carrier abides by this “30-year” rule. At Evolve Insurance Agency we have great relationships with multiple rental home insurance companies who offer replacement cost coverage – for homes over 30 years of age and under 30 years of age. If you are unsure what your policy covers, or just want another look, we’d love to provide you with a quote. Click here or visit the Request a Quote button at the top of our page and we’ll get started on an insurance quote for your rental home right away!
Photo Credit: Karolina Grabowska