How Fire Insurance Policies Work

Fire insurance policies have four areas of coverage; 1) dwelling, 2) other structures, 3) personal property and 4) loss of use / additional living expenses. Here's what each of them covers:

  1. Dwelling. The actual dwelling where you live – your house.
  2. Other structures. Garages, sheds, pool houses or any 'other' structure on the property that is not a part of the dwelling.
  3. Personal property. Your belongings such as furniture, paintings, jewelry, clothing and personal items – basically, the 'contents' of what is inside a dwelling or other structure. If personal property items are not specifically valued and listed in your homeowners' policy, chances are that you will receive a 'standard' amount for each item. While every policy differs, here are some common examples:
  4. • Cash: $200
    • Collectibles: $100
    • Stock, securities and manuscripts: $1,000
    • Jewelry, watches and furs: $1,500 per item, $2,500 total
    • Silverware, tea sets and trophies: $2,500
    • Home computers: $5,000
    • Bicycles: $1,000 per bike, $2,500 total
    • Compact discs and electronic games: $1,000

  5. Loss of use / additional living expense. Additional expenses incurred over and above your normal cost of living. Typical expenses include the cost of staying in temporary housing, clothing, food, the boarding of pets or any other type of expense that you incur when living away from your home during the rebuilding or repair process. It's important to keep track of your expenses during this time so that you can be reimbursed, but keep in mind that most policies have limits on the total that can be spent.

Replacement value vs. actual cash value (ACV): Insurance companies generally pay out losses based on two theories – actual cash value (ACV) or replacement value. Although the theories may be defined a bit differently depending on the policy, ACV generally means that the policyholder will receive the fair market value of the property at the time of the loss (the amount a willing buyer would have paid a willing seller for destroyed property just prior to the destruction).

Replacement value generally means that the policyholder will receive the full value of what it would cost to replace/repair the dwelling. With respect to personal property, insurance companies generally depreciate these items and pay you the actual cash value. When items are replaced, insurance companies will reimburse you the difference.

Replacement value is always preferable to ACV as it makes the homeowner 'whole', whereas ACV reflects the fair market value of the home (and its contents) which may be far less than the replacement value.

In addition to replacement value and ACV, insurance companies may sometimes pay out losses using one of the following theories:

  • Extended replacement coverage. This allows you to replace what you lost at today's prices – up to a set percentage limit – even if the cost exceeds your policy limits.
  • Guaranteed replacement value. Insurance companies used to pay out losses based on a guaranteed replacement value, which meant that a policyholder would recover the full cost to replace their home regardless of policy limits. Unfortunately, most insurance companies haven't written this type of coverage since the early 1990's.
  • A1 / A-2 policies. State Farm has recently sold some policies in California called A1 or A2 dwelling coverage policies. There are basically two levels of replacement – one for "like kind and quality" construction and materials and another for "equivalent construction".

    The first means that your home will be rebuilt or repaired using the same quality of materials; the second means that your home would be rebuilt or repaired using a lesser quality of materials. These types of insurance are not common, so check with your insurance agent for additional information on how the process works.

Water damage. Most homeowners' insurance policies only cover water damage that was the result of firefighters or broken water pipes. Other types of water damage are generally not included in homeowners' policies and must be purchased separately through the Federal Emergency Management Agency (FEMA).

Building code upgrades. Some insurance policies will only pay to replace your home as it was unless you have a building code upgrade provision in your policy. So, if current building codes require homes in your area to have a certain grade of insulation, but your home had a lesser grade, you will be responsible for paying the difference in the rebuilding or repairing process.

Fire Insurance Claim Manual for Homeowners

  1. Fire Insurance Claims Manual Forward
  2. The Basics of Homeowners' and Fire Insurance
  3. How Fire Insurance Policies Work
  4. The Fire Insurance Claims Process: A Step by Step Review
  5. Identifying and Overcoming Fire Insurance Claims Obstacles
  6. Tips to Make the Fire Insurance Claims Process Work Smoothly
  7. Fire Insurance Lawyer - How to Hire