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Damage to Real Property
Having low insurance limits can cost you dearly in this type of claim
If you are in an auto accident and you create damage to real property, you could be faced with a lawsuit. Why? Insurance policies pay for actual cash value (fair market value) and not replacing cost.
What does this mean? This means that your insurance policy will try to depreciate the window, door, fence, kitchen appliance, or whatever you broke with your car.
This is very problematic because most real property (in the last 50 years anyway) appreciates instead of depreciates. The damage done to real property will hurt its value.
If the homeowner is not happy with the insurance offer to pay fair market value, she/he has two options.
He/she could file a claim against his/her homeowner’s insurance.
Homeowner’s policies pay replacement cost and not actual cash value.
Replacement cost is the actual cost that would take you to replace your damaged property (no depreciation involved).
Even then, a homeowner’s policy that covers damage to real property will first pay for the Actual Cash Value (the cost of the damaged property minus depreciation), and once the homeowner actually replaces the property, then the insurance company will make a second payment to bring the total to replacement cost (the total amount).
The theory is that once you receive a payment for the actual cash value of the property, you can go ahead and replace your damaged property.
If you do not replace the property, then the homeowner’s policy saves money on the damage to the real property at the insured’s expense.
The second choice is to simply file a lawsuit against the person that caused the damage. Many people do not like to make claims against their own homeowner’s insurance because it can affect their insurance premiums negatively.
So, if your insurance company is only paying actual cash value, and the other party does not want to make a claim against his own insurance company, then you can be faced with a lawsuit.
If the homeowner’s policy gets involved because of damage to real property, then the payments that they make to their own insured will be subject to the subrogation of rights clauses.
Subrogation of rights clauses allow the insurance company to recover for payments made to their own client because of someone else’s negligence.
In the example above, the insurance company will come after you for the payments they made (replacement cost). But your insurance company only pays actual cash value.
You will have a real dilemma on your hands.
Most insurance companies will pay the subrogation demand and protect you from the paying the difference. Some others will stick to the letter of the policy and say that they only pay actual cash value.
This claim also becomes problematic when determining the actual cash value of the window and how the damage affects the value of the entire house.
The argument will be dragged into the courthouse.
Remember however that reading your insurance policy will be the best way to protect your interest.
If the insuring agreement under the Liability Coverage reads something like
we will pay for all damages that you legally owe because of an auto accidentthen you will be covered.
The next sticky issue with damage to real property claims is the liability limits.
Liability Limits in some states are very low ($5,000). Damage to real property can easily reach $5,000. You will be responsible for any damage above and beyond that.
Make sure you have adequate insurance coverage.
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