For property owners, fire insurance is a foundation of management risk control. However, not many owners have an accurate understanding of "how the coverage amount is determined" or "whether appropriate coverage has been set for their property". This article explains the valuation method for coverage amounts, along with practical points for choosing and reviewing insurance.
How is the coverage amount for fire insurance determined?
The coverage amount for fire insurance is set based on the "insured value." The most common valuation method today is the replacement cost (new value).
What is replacement cost?
Replacement cost is the amount required to repair or rebuild a damaged building or household contents with an equivalent item. Unlike the "actual cash value" used in the past, which deducts depreciation over time, compensation is based on current construction costs, allowing coverage that is closer to actual needs.
Buildings and household contents are valued separately
Because valuing a building requires professional judgment, we recommend consulting a specialist such as an insurance agent. Household contents are calculated either through a "simplified valuation" based on the age of the head of household and family composition, or by totaling the value of the contents you own. Once the insured value has been determined, the basic rule is to set the coverage amount at the upper limit of that value.
What should property owners keep in mind when choosing coverage?
The scope of coverage varies by insurer, but standard "residential fire insurance" generally covers a wide range of risks, including fire, flood, typhoon, lightning, theft, and water leakage.
- If a fire breaks out in an apartment and it becomes uninhabitable, hotel accommodation costs may also be covered in some cases
- Liability for damage to third parties is not included in standard fire insurance and requires a separate rider
- The maximum insurance term is currently 10 years (contracts of up to 36 years existed in the past)
Three points to review if your premium feels high
1. Align coverage with your lifestyle and local risk profile
If your area has a low flood risk, you can reduce premiums by removing flood coverage and other unnecessary protections. Also confirm that personal liability insurance is not duplicated under your auto insurance policy.
2. Set a longer insurance term
If you are not planning to move or sell, a longer-term contract may reduce the total premium cost. More insurers are setting a maximum term of five years, so check the conditions carefully.
3. Reduce total payments with a lump-sum payment
In most cases, annual or one-time payment results in a lower total premium than monthly payment because the amount is paid together.
Frequently Asked Questions (FAQ)
Q1. What happens if the coverage amount is lower than the insured value?
This becomes "underinsurance," and the full amount of the loss will not be covered. The coverage amount should always be set at the upper limit of the insured value.
Q2. Does fire insurance need to be renewed?
Yes. Because contracts are currently limited to a maximum of 10 years, renewal procedures are required before the term expires.
Q3. Should a rental property owner insure the building or the household contents?
For owners, the basic approach is to carry fire insurance that covers the building. Household contents are covered by the tenant's own contents insurance.
Q4. Should flood coverage always be included?
Please decide after checking flood and inundation risk on the hazard map. In low-risk areas, removing it can reduce premiums.
