Consumer Counselor
Insurance Information for Michigan Consumers
[FIS-PUB 0208] Michigan Department of Insurance and Financial Services | 877-999-6442 | www.Michigan.gov/DIFS [11/19]
Homeowners Insurance
Replacement vs Repair Cost Policies
Homeowners insurance is a “package” policy
which is made up of two basic parts:
1. Property insurance - Insurance that
protects your dwelling and personal
belongings in case of fire, theft, vandalism,
etc.
2. Liability coverage – Covers losses for which
an insured is legally liable. For homeowners
insurance, liability coverage protects you
against financial loss if you are sued and
found legally responsible for someone else’s
injury or property damage.
There are two types of homeowners insurance
policies offering different kinds of property
protection: replacement cost policies and repair
cost or market value policies. Both types offer
the same kind of liability protection. The two
types differ in the amount and type of property
protection coverage. Following is a description of
the two types of homeowners policies.
Replacement Cost Policy
Replacement cost policies are what most people
mean when they say “homeowners insurance.”
This type of policy generally provides more
complete coverage for your money. The amount
of insurance you buy is based on what it would
cost to replace your property.
A replacement cost policy will pay the amount
needed to replace, rebuild or repair your damaged
property to its original condition with materials of
the same kind and quality. For example, if your
hardwood floor is damaged, it can be replaced
with the same type of wood. If you do not repair,
rebuild, or replace the damaged property, the
insurance company is only required to pay you
what the property was worth before the damage.
This amount will be less than the replacement
cost because it will subtract an allowance for
depreciation.
By law, a company can refuse to sell you a
replacement cost policy if your property is not
worth at least $35,000. You can also be turned
down for this type of policy if you refuse to buy
enough insurance to cover 80% of the
replacement cost of your property.
Frequently, damage to property does not result in
a total loss. Insuring at least 80% of the
replacement cost of your home will cover most
losses that may happen. Most companies require
you to carry insurance equal to at least 80% of the
replacement cost of your home or else they will
not pay the full cost of repairing, rebuilding, or
replacing a partial loss. If you do have a serious
or total loss, you will not be paid more than the
total amount of the policy.
When the cost of replacing your property is much
higher than what it is currently worth, an
insurance company may not want to sell you a
replacement cost policy. If the company chooses
not to offer you a replacement cost policy, it must
offer you a repair cost policy instead.
Repair Cost (Market Value) Policy
This type of policy pays to replace, repair or
rebuild your damaged property to a condition
similar to what it was before the damage, using
contemporary materials. For example, your
damaged plaster walls may be replaced with
drywall.
[FIS-PUB 0208] Michigan Department of Insurance and Financial Services | 877-999-6442 | www.Michigan.gov/DIFS [11/19]
Like the replacement cost policy, the repair cost
policy also requires that the property be repaired,
rebuilt, or replaced. Otherwise, you will be paid
only the depreciated value of the property before
it was damaged. If you have a serious or total
loss, you will receive no more than the maximum
amount of the policy, which is the market value of
the property. This will likely not be enough to
repair, rebuild or replace the property to its
original condition.
In order to qualify for a repair cost policy through
a regular company, your property must be worth
at least $15,000 and you must buy an amount of
insurance equal to the property’s market value.
How to Decide What You Need
When you are deciding which type of policy suits
your needs, consider what your house is worth,
how much it would cost to replace it, and how
much you can afford to spend for insurance.
For example, if you have a newer house, you
probably would want to return it to its original
condition if it were damaged. In this case, a
replacement cost policy would be a good choice.
On the other hand, because older homes are
often built with unusual, hard-to-get or expensive
materials, they sometimes have a very high
replacement cost. They sometimes do not have
an equally high market value, however. If the
market value is small when compared to the
replacement cost, and it is not important to return
the property to its original condition, you may
wish to buy a repair cost policy.
In the case of a partial loss, for many people a
repair cost policy will provide the same coverage
as a replacement cost policy. If you have a total
loss, a repair cost policy will pay you the market
value of your home. This will probably not be
enough to replace it.
Both the repair cost and the replacement cost
policies protect you from a wide variety of
possible losses and protect both buildings and
their contents.
What to Do if You Cannot Get Homeowners
Insurance From a Regular Company
The Essential Insurance Act provides these two
choices so that homeowners insurance will be
available to every eligible person in Michigan.
The Insurance Counselor entitled “Homeowners
Insurance: Are You Eligible?” explains who is
“eligible” for homeowners insurance.
If you are unable to get homeowners insurance
through the regular market, you may ask your
agent to apply to the Michigan Basic Property
Insurance Association (MBPIA). The MBPIA was
created to provide property insurance to qualified
persons who cannot get insurance in the regular
market. If you are qualified, you can get
insurance through the MBPIA, which is basically
the same as insurance from regular companies,
up to a specified maximum amount. The
Insurance Counselor entitled “Michigan Basic
Property Insurance Association” gives more
information about the MBPIA.
REMEMBER, if one company or one agent does
not offer you the type of policy you want and
need, SHOP AROUND. Be sure to get the best
combination of price, coverage and service for
your money.
About DIFS
The mission of the Michigan Department of
Insurance and Financial Services is to ensure
access to safe and secure insurance and
financial services fundamental for the opportunity,
security and success of Michigan residents, while
fostering economic growth and sustainability in
both industries. In addition, the Department
provides consumer protection, outreach, and
financial literacy and education services to
Michigan citizens. For more information please
contact DIFS at 877-999-6442 or visit
www.michigan.gov/DIFS
