Before you accept coverage from your insurer, it is important to understand the fine print. Many insureds assume that because they pay a premium every month, any claim that they submit will be paid in full. The existence of property damage insurance attorneys proves that the process is not always so seamless. One of the things that homeowners do not spend much time researching is the policy limits for their particular plan. Read on to learn about policy limits.

What Are Policy Limits?

A policy limit represents the maximum dollar amount that an insurance company will pay out. There can be a policy limit for a duration of time, or an event, or a type of damage. For instance, the policy limit may be in effect for the length of your contract or for each year. Policy limits will also differ from plan to plan. 

Here is an example of how policy limits work. Let’s say that your homeowner’s insurance policy limit is $400,000. That means the largest check that your insurance company will write for damages under the contract or insurance policy is $400,000. They will not send that dollar amount out for any damage; they will only issue an amount covering your actual damage.

Typically, the higher your limit, the greater your premium will be. Once your damage is covered, you will get a check minus whatever your deductible is. The deductible is the amount of money that you have to pay upfront. Then, the insurance company will pay for the rest up to whatever the policy limits are.

Types of Policy Limits

Here are some other terms that are associated with policy limits. Sub-limits are limits for add-on items to your homeowner’s policy. For instance, you may have an expensive piece of artwork that, if damaged, would exceed the maximum amount under the typical policy. This protects the policyholder in the event that there is great damage so that everything is covered under the policy. Aggregate limits represent the total amount that the insurer will pay out to settle your claims. 

How are the Policy Limits Set?

The policy limits will vary based on how your insurance plan is set up. There is a difference between the replacement cost and the actual cash value. The replacement cost is the amount of money needed to repair or replace your damaged property with materials of a similar type or quality. It does not deduct for the depreciation of the property. For instance, if your property was worth $10,000 when it was new, and it is worth only $8,000 now due to wear and tear, the amount offered by the insurance company would still be $10,000. On the other hand, the actual cash value is the amount that is needed to repair or replace the item minus the depreciation. For instance, let’s say that you have siding with a ten-year expectancy. If the siding was installed eight years ago, then you have used eight out of the ten years of the siding. Rather than pay for brand new siding, the company would give you the value of two years’ worth of the siding.

Personal choice also comes into play. The insurer may have a maximum dollar value that they will pay out for any of their plans, but there may be different tiers of plans. If you have a mortgage, your lender may require insurance. They also may require you to hold insurance with minimum policy limits. Beyond this, you still have some choice. How do you decide your limits? Consider the cost of repairing, replacing, or rebuilding your property.

What Happens if My Damage Exceeds the Policy Limit?

The insurance company will pay up to the maximum policy limit if they find that the damage warrants it and it is covered under the policy. Beyond that, you will foot the bill for any additional damage. In other words, if the aggregate limit is $300,000, and you have damage that is $325,000, then the loss over the limit ($25,000) would be your responsibility to cover.

Are You Only Able to Get Covered Up To the Limits In Your Plan? 

The short answer: no. Policyholders have the ability to get additional coverage to protect them beyond what the typical homeowner’s insurance policy will cover. Here are a couple of examples:

Catastrophe Insurance

Catastrophe insurance, also known as cat insurance, will cover loss as a result of catastrophic circumstances.

Umbrella Policy 

Umbrella insurance will give coverage that is beyond the limits of the insurance policy you have. It also may cover claims that will not be covered by other liability policies. This would cover things like lawsuits, injuries, or other property damage.

Excess Insurance

Excess insurance differs from umbrella policies but is similar in that you can get more money following an incident. This type of policy provides additional money over the underlying policy. But it differs from an umbrella policy in that it does not expand the scope of the underlying policy or the types of things that are covered.

How Do I Know What Policy Limits Will Be Enough?

The question that many homeowners have is whether they should purchase additional insurance. This is a very individualized answer. On the one hand, you cannot predict with certainty whether there will be a catastrophic event that will exceed the policy limits under your plan. Once in a while, a homeowner will be left with bills beyond what is paid out by the insurer. However, if you are susceptible to certain catastrophes–such as living in a zone that is prone to flooding–or have a property with a large dollar value–it may be wise to purchase additional insurance or include additional things under your Florida property insurance policy.

Speak to a Homeowners’ Insurance Attorney 

Contact our office at 321-342-1759 to speak with one of our homeowners’ insurance attorneys if you would like to discuss the particulars of your situation. We present the material contained on our website for general informational purposes only. It does not constitute the rendering of legal advice and does not create any attorney-client relationship. If you need legal or other professional advice, you should consult with legal counsel about your particular facts and circumstances. Call 321-415-9012 or contact us online to see how we may be able to fight for your claim!