Personal Property Insurance

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.

Cash versus Replacement Cost 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:

• Antiques or Rare Items: these are items that are not easily replaced at any cost; this includes fine art, paintings, collectable items, and souvenirs.

• Outdated Items: items that are obsolete or not in workable condition.

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.

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. For example when a burglary occurs and high-value items are stolen. Burglary statistics say nearly $3,000 is stolen during a single burglary.

Finally, here are some tips to help with the inventory of personal property:

• Keep all sales receipts of major purchases.

• Take a video inventory or photographic inventory of all personal property.

• Keep the valuation worksheet, photographs, and video in a safe place.

• If at all possible, keep the inventory list, along with photos and inventory videos, in a safe and secure place away from the home such as a bank safe deposit box or in a fireproof safe.

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