Insuring an older home: coverage gaps and how to close them

Replacement cost versus actual cash value

The Texas Department of Insurance explains the difference with a roof example. A roof installed 10 years ago would cost $10,000 to replace today.

• Replacement cost coverage pays to replace it at today's prices. With a $2,000 deductible, the insurer pays $8,000.
• Actual cash value coverage pays replacement cost minus depreciation. If the roof's actual cash value is $7,000, the insurer pays $5,000 after the deductible, and your out-of-pocket cost is $5,000 instead of $2,000.

In an older home, much of what you would claim on has depreciated. TDI says that to be fully protected, you should make sure your policy has replacement cost coverage. Read how the policy settles roof claims in particular, since that is where depreciation adds up fastest.

Insuring to value

TDI notes that most companies require you to insure your house for at least 80 percent of its replacement cost, and some require 100 percent. Utah's Insurance Department gives the same 80 percent guidance. If you carry too little and have a total loss, you pay the difference yourself.

Older homes are where underinsurance is easiest to miss. Ask the insurer how it estimated replacement cost and whether it accounted for features like plaster, hardwood and custom millwork.

Your lender has requirements too. For conventional loans, Fannie Mae's Selling Guide sets minimum property insurance coverage that the lender will check before closing.

Building code upgrades

If a fire damages part of an older home, the local building department may require repairs to meet current codes, such as new wiring, plumbing or structural standards. Standard coverage may not pay all of those extra costs. TDI lists endorsements for extra construction or repair costs to meet local building codes, and for extra costs if the policy does not pay enough to rebuild.

Ask each insurer what code upgrade coverage is included and what an endorsement would add.

Claims history

TDI explains that most insurers use the Comprehensive Loss Underwriting Exchange, or CLUE, to check claims history. CLUE reports show claims on both people and houses for the last seven years, regardless of who owned the home at the time. An insurer can charge more or refuse coverage based on the report.

You can get a free copy of your own report each year from LexisNexis, and you can challenge wrong information. For the house, ask the seller to share the property's report or claims history, since past water or roof claims can affect your quotes.

Lowering the premium

TDI notes that each company decides what discounts to offer. Discounts may be available for:

• a monitored burglar or fire alarm
• a sprinkler system
• an impact-resistant roof
• a newer home or a home in good condition

Utah's guidance adds that some insurers offer lower prices for bundling home and auto or for replacing the roof. A higher deductible can also lower the premium, as long as you can afford to pay it.

Updates you plan anyway, such as a new roof or electrical panel, may lower your premium. Ask insurers before you schedule the work.

The bottom line

An older home can cost more to rebuild than its market value suggests. Choose replacement cost coverage, insure to at least the level your insurer requires, consider building code coverage and check the property's claims history. Get quotes during your inspection period so insurance findings can shape your offer.