Letter to the Sarasota Herald Tribune Editor

This letter was published in today's (1/19/2012) Sarasota Herald Tribune:

"Dear Editor:

"I read with interest the article in Monday's paper about people who are complaining that they are forced to pay insurance premiums on amounts that are much more than the market value of their homes. What these people fail to understand is that insurance valuation has absolutely nothing to do with the market value of their home. Insurance valuation is based on the cost to replace the home should it be destroyed, not what it would sell for in the open marketplace.

"In the example cited in the article, say the house with a market value of $33,500 is insured for $33,500. If it were destroyed by fire and the homeowner wished to rebuild, but the rebuilding costs would total $124,000 what would the homeowner do? Probably, bring a bad faith lawsuit against the insurance company, claiming the insurance carrier knew full well that the cost to rebuild the house far exceeded the amount of insurance on the house, yet chose to insure it for only the market value. Conversely, there are situations where the cost to rebuild is exceeded by the market value. Often, those owners want to insure their house to the market value and expect to receive the full value of the policy, rather than rebuilding should a total loss occur. If the cost to replace is less than the market value, the house will be rebuilt.

"People must understand that insurance values are construction cost driven and not market driven. Insurance claims are settled on the lesser of three options: the cost to repair; the cost to replace; or the actual cash value, meaning replacement cost minus depreciation. In the final analysis, it must be understood that the obligation of insurance is to place the insureds back into the place they would have been, had there been no loss."