How Fire Insurance Policies Work

UPDATED: Jul 13, 2023Fact Checked

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Jeffrey Johnson

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 13, 2023

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UPDATED: Jul 13, 2023Fact Checked

Fire insurance policies have four areas of coverage; 1) dwelling, 2) other structures, 3) personal property and 4) loss of use / additional living expenses. Here’s what each of them covers:

    1. Dwelling. The actual dwelling where you live – your house.
    2. Other structures. Garages, sheds, pool houses or any ‘other’ structure on the property that is not a part of the dwelling.
    3. Personal property. Your belongings such as furniture, paintings, jewelry, clothing and personal items – basically, the ‘contents’ of what is inside a dwelling or other structure. If personal property items are not specifically valued and listed in your homeowners’ policy, chances are that you will receive a ‘standard’ amount for each item. While every policy differs, here are some common examples:

• Cash: $200
• Collectibles: $100
• Stock, securities and manuscripts: $1,000
• Jewelry, watches and furs: $1,500 per item, $2,500 total
• Silverware, tea sets and trophies: $2,500
• Home computers: $5,000
• Bicycles: $1,000 per bike, $2,500 total
• Compact discs and electronic games: $1,000

  1. Loss of use / additional living expense. Additional expenses incurred over and above your normal cost of living. Typical expenses include the cost of staying in temporary housing, clothing, food, the boarding of pets or any other type of expense that you incur when living away from your home during the rebuilding or repair process. It’s important to keep track of your expenses during this time so that you can be reimbursed, but keep in mind that most policies have limits on the total that can be spent.

Replacement value vs. actual cash value (ACV): Insurance companies generally pay out losses based on two theories – actual cash value (ACV) or replacement value. Although the theories may be defined a bit differently depending on the policy, ACV generally means that the policyholder will receive the fair market value of the property at the time of the loss (the amount a willing buyer would have paid a willing seller for destroyed property just prior to the destruction).

Replacement value generally means that the policyholder will receive the full value of what it would cost to replace/repair the dwelling. With respect to personal property, insurance companies generally depreciate these items and pay you the actual cash value. When items are replaced, insurance companies will reimburse you the difference.

Replacement value is always preferable to ACV as it makes the homeowner ‘whole’, whereas ACV reflects the fair market value of the home (and its contents) which may be far less than the replacement value.

In addition to replacement value and ACV, insurance companies may sometimes pay out losses using one of the following theories:

  • Extended replacement coverage. This allows you to replace what you lost at today’s prices – up to a set percentage limit – even if the cost exceeds your policy limits.
  • Guaranteed replacement value. Insurance companies used to pay out losses based on a guaranteed replacement value, which meant that a policyholder would recover the full cost to replace their home regardless of policy limits. Unfortunately, most insurance companies haven’t written this type of coverage since the early 1990’s.
  • A1 / A-2 policies. State Farm has recently sold some policies in California called A1 or A2 dwelling coverage policies. There are basically two levels of replacement – one for “like kind and quality” construction and materials and another for “equivalent construction”.The first means that your home will be rebuilt or repaired using the same quality of materials; the second means that your home would be rebuilt or repaired using a lesser quality of materials. These types of insurance are not common, so check with your insurance agent for additional information on how the process works.

Water damage. Most homeowners’ insurance policies only cover water damage that was the result of firefighters or broken water pipes. Other types of water damage are generally not included in homeowners’ policies and must be purchased separately through the Federal Emergency Management Agency (FEMA).

Building code upgrades. Some insurance policies will only pay to replace your home as it was unless you have a building code upgrade provision in your policy. So, if current building codes require homes in your area to have a certain grade of insulation, but your home had a lesser grade, you will be responsible for paying the difference in the rebuilding or repairing process.

Fire Insurance Claim Manual for Homeowners

  1. Fire Insurance Claims Manual Forward
  2. The Basics of Homeowners’ and Fire Insurance
  3. How Fire Insurance Policies Work
  4. The Fire Insurance Claims Process: A Step by Step Review
  5. Identifying and Overcoming Fire Insurance Claims Obstacles
  6. Tips to Make the Fire Insurance Claims Process Work Smoothly
  7. Fire Insurance Lawyer – How to Hire

Case Studies: Understanding Fire Insurance Policies and Coverage

Case Study 1: The Smith Residence

The Smith family experienced a fire that caused extensive damage to their home. Fortunately, their fire insurance policy covered the dwelling, personal property, and additional living expenses. The insurance company paid out the replacement value, ensuring that the Smiths could rebuild their home to its original state using the same quality of materials.

Case Study 2: The Johnson Family

In another case, the Johnson family faced a fire that resulted in significant damage to their property. However, their fire insurance policy only offered actual cash value (ACV) coverage. As a result, they received compensation based on the fair market value of their home and belongings at the time of the loss. Include replacement value coverage in the future.

Case Study 3: The Thompson Residence

The Thompsons experienced water damage caused by a burst pipe. Unfortunately, their homeowners’ insurance policy did not cover this type of damage. They had to purchase separate coverage through the Federal Emergency Management Agency (FEMA) to receive compensation for the water damage repair costs.

Case Study 4: The Brown Family

When the Brown family’s home was destroyed by a fire, they discovered that their insurance policy included a building code upgrade provision. This provision ensured that their home would be rebuilt to meet the current building codes, even if it required using higher-grade materials.

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Jeffrey Johnson

Insurance Lawyer

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Insurance Lawyer

Mary Martin

Published Legal Expert

Mary Martin has been a legal writer and editor for over 20 years, responsible for ensuring that content is straightforward, correct, and helpful for the consumer. In addition, she worked on writing monthly newsletter columns for media, lawyers, and consumers. Ms. Martin also has experience with internal staff and HR operations. Mary was employed for almost 30 years by the nationwide legal publi...

Published Legal Expert

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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