How Is Home Insurance Calculated? 

Researching home insurance policies can be daunting, leaving you to ask questions. How does home insurance work? How is home insurance calculated? What can I expect to pay where I live? We’ve laid out the basics of home insurance for you to help clear up some of these questions.

How Home Insurance Works

Home insurance, also known as homeowners insurance, is an essential protection for your home and possessions against damage and theft. Home insurance policies vary, but they are meant to cover the cost of damage in case of emergencies like fire, hurricanes, vandalism, and more that may be included in an individual policy. The insurer will compensate you for this damage, which can cover repairs or rebuilding, along with the contents of your home if damaged or destroyed in a disaster covered in your policy. Unfortunately, in some cases the insurer may try to underpay your claim, or settle for less than the cost of the damages to your home.

Oftentimes, issues like earthquakes and floods are not covered in basic home insurance policies, so you may need a separate policy to cover that.

The vast majority of mortgage companies require their borrowers to have home insurance covering the full or fair value of a property, and in fact require proof of it before making a loan. Even without owning a home, you may need similar insurance—landlords often require their tenants to have renter’s insurance coverage.

Home Insurance Average Cost

The cost of home insurance varies greatly from state to state, from insurer to insurer, from home to home, and from person to person. That’s part of the reason that trying to understand how home insurance works can be so complicated.

The home insurance average cost is about $1,445 at the national level, according to ValuePenguin. However, it is important to keep in mind several factors in this average. First of all, the national average cannot give you a real ballpark of what to expect in your own situation. The states with the highest home insurance average cost are Oklahoma and Kansas, costs buoyed by frequent tornadoes. The states with the lowest average premiums are Delaware, Vermont, and Pennsylvania, which fall well below the national average. This can be attributed to factors like fewer natural disasters, lower home values, and more.

So that’s the home insurance average cost, but that doesn’t tell us what we as individuals might pay based on our specific circumstances. Even understanding these averages, many are left wondering: exactly how is home insurance calculated, what factors in to these calculations, and what can I expect from this process?

How Is Home Insurance Calculated?

Home insurance calculations take a slew of factors into account. These factors often include:

• The cost of replacing the home.
• Age of the home (new homes are often cheaper).
• Home square footage (bigger equals higher).
• Number of primary inhabitants (more people increases potential liability).
• Construction type (fire-safe materials vs. wood).
• Roof type.
• PPC (Public Protection Classification, measuring proximity to emergency services like police, fire station, and hydrants).
• Claims history in the area.
• Personal claim history.
• Pets (certain breeds and bite histories).
• Credit score.
• Your deductible.
• Security or fire alarm.
• Deadbolt locks.
• Crime rate in the neighborhood.
• Attractive nuisances (something that can draw children in but could be dangerous, like swimming pools, trampolines, and more).

Depreciation of Labor in Actual Cash Value

When an insurer pays out on a policy, they may deduct depreciation from the actual cash value (ACV) of the property. Generally, it is accepted that this depreciation includes the cost of materials. However, the depreciation of labor involved may not be so clearly delineated.

Indeed, there is reportedly a divide among the courts regarding the depreciation of labor and whether or not this should be factored in against the actual cash value.

In February 2020, the North Carolina Supreme Court found that depreciation of labor was included in the calculations of the ACV cost. However, the 6th U.S. Circuit Court of Appeals ruled differently when they found that an insurer who deducted labor along with material as part of the depreciation cost when calculating a property damage claim may not have been entitled to do so under Ohio law.

Filing an Underpaid Home Insurance Claim Lawsuit

If you believe you were underpaid for the labor portion of your home insurance claim, you may be able to file a lawsuit and pursue compensation.

Filing a lawsuit can be a daunting prospect, so Top Class Actions has laid the groundwork for you by connecting you with an experienced attorney. Consulting an attorney can help you determine if you have a claim, navigate the complexities of litigation, and maximize your potential compensation.