Total Loss refers to the cost involved in replacing or repairing an insured item. Some insurance companies pay the market value of the insured item at the time of loss and this may not be adequate to fix or replace the item. However, if you have opted for personal property replacement cost coverage (Total Loss) in your homeowner's insurance policy, your insurance carrier will pay the full cost to replace or repair the item.
To obtain total loss replacement cost coverage, you need to insure your dwelling or property for a minimum of 80% of the replacement cost. As long as the requirements are met, your insurer will pay you the total cost of replacing your house. However, if the house is not insured for 80% value, then the payments for partial losses will be reduced.
Total loss is not included in standard homeowner's insurance policies. Several insurance companies offer total loss coverage as an endorsement that provides full coverage to your dwelling in case it is completely damaged due to unforeseen peril, covered in your insurance policy. The total loss coverage can help you obtain additional amount than your coverage limit. This additional amount is provided considering the demand surge or possible miscalculation of the property value, when granting the insurance policy. The additional amount (more than the coverage limit) can be in the range of 25% to 100% and depends on the terms of endorsement.
Your insurance carrier takes into account the total loss coverage (if you have opted for) when deciding the premium for your homeowner's insurance policy. In a majority of the cases, the premium of home insurance policies with total loss coverage is very high. If you are opting for total loss coverage, the best thing you can do is find out the exact coverage you need. This way you will be able to lower the premium to some extent.
The common mistake that people commit while taking homeowners insurance is they consider the market value of the property. They completely ignore the building cost of the property. The cost of material and labor is constantly increasing in today's economy. Hence the cost of restoring or replacing the property to current value will be higher than the market price alone. One of the biggest advantages of Total loss coverage is your insurance carrier will pay the amount required to rebuild or replace the property to its current value without considering the depreciation of the property.