Purchasing a home is a big financial step in anyone’s life. We all want to make sure we get enough insurance to protect our investment. Usually, our insurance agent or another representative of the insurance company will inspect our home to determine the amount of coverage needed to protect our investment – which is usually based on an estimate of how much it would cost to replace our home in the event of a total loss. It is in our best interest to let the insurance company know anytime we add on or do anything to increase the value (and replacement cost) of our home so that the increase can be covered.

But what about increases in replacement cost that happen because of inflation instead of any additions we make on the home? If, for example, we get $100,000 of coverage because that is what it would cost to rebuild our home in today’s market; what happens if our house burns down a year from now and because of inflation in the cost of labor and materials it would now cost us $120,000 to rebuild the same home? What happens if the insurance company takes six months to pay our claim, and due to inflation the cost to rebuild is now $130,000?

What is “inflation coverage” or “inflation protection”?

Most homeowner’s insurance policies include something called “inflation coverage” or “inflation protection” that is supposed to cover these inflation related replacement cost increases. We may not realize it, but part of our what we pay in premiums is paying for that additional coverage. (We should all check with our agents to make sure our policies include inflation coverage).

The trick, and what Homeowner’s Insurance Companies don’t want us to know, is in how the inflation coverage is calculated. Most policies provide a mathematical formula for determining how much inflation will increase the amount of coverage. But most policies don’t tell us exactly where the numbers to be used in those formulas come from. For instance, many policies say that the amount of inflation coverage will be determined by dividing the “inflation factor” listed in the policy into the “inflation factor” on a “given date”. However, in most cases, the insurance company / policy does not tell us what the source of the new “inflation factor” is; or even what is meant by a “given date”.

This lack of information allows insurance companies to pick and choose the numbers to limit the amount of inflation coverage provided. For example, if inflation is lower on the date of loss than the date when they finally get around to paying the claim, the insurance company might say “given date” means the date of loss – and vice versa. If no source for the inflation factor is identified in the policy, the insurance company can pick and choose from a multitude of private and government sources for inflation rates to find the lowest possible inflation rate to increase our coverage by. In some cases, the insurance company may not give us the benefit of our inflation coverage, since they know many insureds are not aware of it. The result – our insurance company may pay us less than it actually owes.

How do we know if we get the full benefit of the inflation coverage we paid for?

When an insurance company pays a total loss under a homeowner’s policy, they usually don’t include a detailed explanation of whether and/or how any inflation coverage increase was calculated. So, even if an insurance company pays for a “total loss” and pays the full amount of coverage listed on the policy when you bought it, they may not be paying the full amount they actually owe on the claim.

If you suffered a total loss of your home and/or received payment from an insurance company for a “total loss”, it is important to make certain you received all the coverage you paid for. If you aren’t sure whether you received full coverage, contact Van Cleave Law today. Our dedicated legal team has the knowledge and experience to deal with insurance companies that try to avoid paying everything to owe to their policyholders. Sometimes, our intervention can help you resolve a claim without you having to file a lawsuit against the insurance company or even pay any attorney fees. If legal action is necessary, we are willing and able to take your claim to Court.