Monsoon is a wonderful season, providing relief from the scorching heat. However, for several parts of the country, the rainy season brings with it the threat of floods and the risk of damage to our homes and belongings. In fact, more than 40 million hectares of land across India face the risk of floods. This is spread across states like Punjab, Haryana, Orissa, Assam, West Bengal, Uttar Pradesh, North Bihar, and Tamil Nadu, which experience severe waterlogging.
India faces all kinds of floods – coastal floods, flash floods and urban floods. The situation is only getting worse. Global warming has resulted in melting glaciers and rising sea levels, which has made natural calamities more frequent and more devastating. A comprehensive flood insurance policy can help provide financial support to repair your home and replace precious belongings.
When choosing a flood insurance policy there is one important consideration: Does the insurer provide replacement cost or actual cash value for your home. Let’s understand what these two terms mean to make the right choice.
Replacement Cost in Flood Insurance
This is the cost of repairing or replacing your home or the damaged portion of your home (like ripped flooring, damaged wall, broken furniture). This means the insurer considers the cost of rebuilding the same house or the same floor or wall.
Actual Cash Value in Flood Insurance
Rather than considering the cost of repairs or replacement, the insurer may reimburse you based on the market value of the house. According to the Insurance Regulatory Development Authority of India, for the purpose of home and flood insurance, the market value of your home is taken as the price at which you originally bought the property.
What happens if the complete house is not damaged by the flood? In this case, the insurance provider will consider the value of the part of the house that is affected and deduct an amount for regular wear and tear.
Replacement Value or Actual Cash Value: Which One is Better
Replacement cost in flood insurance is generally preferred by homeowners because:
· Your intention is usually to rebuild your home or replace the item that has been damaged, and the insurance payout considers exactly this.
· The insurer does not consider any depreciation to calculate the claim settlement.
· Given inflation, the cost of labour and materials may have risen significantly since you originally purchased the house. Since replacement cost considers this, the payment could be higher than actual cash value.
In actual cash value, the insurer makes deductions for wear and tear, which means the payout may be less than the cost of rebuilding your home or replacing the damaged parts of your home.
Structural damage to your home, damage to walls or roof, short circuit, and furniture damage due to floods are generally included in a flood insurance policy. However, if damage has been caused due to negligence or if some items are not listed in your policy, these will not be covered during claim settlement. Flood insurance policies also typically exclude any cost of removal of debris.
