The insurance company and lender, if the property is mortgaged, will usually require that the property be insured at replacement cost. Replacement cost is the amount of money it would take to replace or rebuild your home with materials similar to the kind and quality used in constructing your home.

If replacement cost is used to determine claims on your home, there is no deduction for depreciation, a decrease in value over time due to age or wear and tear. Construction costs, changes in building codes, and new energy and safety requirements can make replacing all or part of your home cost more than the home’s market value.

The state of Florida requires that your house be valued at its replacement cost in determining adequate coverage. Where replacement cost is used in determining coverage, the policy limit is usually set for at least 80% of your home’s replacement cost.

If you fail to insure your home for at least 80% of the replacement cost, your insurer will assess a penalty on partial loss claims. The penalty is called the coinsurance provision  of the  policy. The coinsurance provision penalizes the insured’s loss recovery if the limit of insurance purchased by the insured is not equal to or greater than a specified percentage (commonly 80%) of the value of the insured property.

Additionally, the mortgage lender will buy more insurance to cover the shortfall.

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