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View Full Version : Home insured for the wrong amount, what happens?


Napier
08-29-2016, 09:49 PM
If you insure a house for less than it costs to rebuild, and it gets destroyed, you're just out for the difference, right? (If there's a bank involved they may do something to make sure the insurance covers their share, but let's say there's no bank.)

If you insure a house for more than it costs to rebuild, you just waste money, right?

Home insurance policy writing seems quite casual regarding what amount to write into the policy. Are there any safeguards that keep consumers from winding up unable to replace their homes, or overpaying for policies?

I'm shopping home insurance and potential insurers are coming up with values about 30% apart. How do I, the consumer, get the value where it should be? Do I have to get quotes from a contractor or something?

Oddball_92
08-29-2016, 10:11 PM
Insurance companies will not pay out one dime more than the policy limits. So if you have a home under insured you are out of luck. If there is a lien holder they get paid first. Homeowners policies are in 2 (basic) parts...structure and contents. There are no "safeguards" I am aware of, other than having a good agent who will advise you. One thing you might do is talk to a builder in your area and see about how much per square ft they charge to build a house comparable to what you have using similar grade materials (of course, don't forget the cost of demo on the destroyed home). Better to be a bit over-insured than under-insured.

watchwolf49
08-29-2016, 10:15 PM
Get an assessor out there and have them determine the replacement value. It might cost a couple hundred dollars. Don't forget to update the value every three years or so, inflation is real and the replacement costs will be going up over the years you'll be living there. Insurance for your contents should match the value of your stuff, and make a list of your possessions in your home, any agent should have a pre-printed form you can use.

ETA: Yeah, get a good agent ... they'll be worth the little extra cost in the long run ... great catch Oddball_92

ZipperJJ
08-29-2016, 10:45 PM
Last time I sat down with my insurance agent we went through this computer program he had, line by line, and adjusted the replacement value of all the parts of my house.

Like...what kind of counter tops in the kitchen? Are the walls and attic insulated? Is the basement finished? What price level are my windows? etc etc I was actually over-insured to replace my actual house and was able to lower my insurance costs.

Your insurance agent should have a program like this. See if you can get the info from them and then use it to shop around.

OldGuy
08-29-2016, 10:50 PM
If your house is under-insured and not destroyed completely, you might not eve get the face amount. Suppose you're insured for $200,000 and your house is worth $300,000. If you have a partial loss of $250,000, you'll only get 2/3 of that or 166,666.67 because you're only 2/3rds insured.

md2000
08-30-2016, 02:27 AM
I recall a fire in a small apartment building near where I used to live. The roof was gutted, smoke and water damage. The real estate market in town was abysmal, so the owner wanted to write it off, tear it down, take the money and run. The insurance company said "we don't care if the rental building won't make a profit easily; it's cheaper to repair, were are going to pay for repair." How much to spend is their call, provided you get the replacement or the maximum of the policy, whichever is less.

Yeah, if there's a bank involved, if the insurance doesn't cover the mortgage balance outstanding and the house as is is not sellable for the balance, the bank can come after you for the difference. Assuming they know how to get blood from a stone.

Basically, from what I understand of my insurance, two scenarios -

Cheaper to repair/rebuild - (I.e. that costs less than total insured value) insurance company will rebuild.

Not enough insurance - the damage is greater than the coverage, so the insurance company gives you that coverage amount, and they're finished. What you do next is your problem. Rebuild using some of your own cash also, walk away, etc.

if there is an outstanding mortgage, if the insurance company is handing out money instead of paying for a rebuild/repair, they will pay off any mortgage to the bank before you get money to walk away with.

Tired and Cranky
08-30-2016, 09:32 AM
If your house is under-insured and not destroyed completely, you might not eve get the face amount. Suppose you're insured for $200,000 and your house is worth $300,000. If you have a partial loss of $250,000, you'll only get 2/3 of that or 166,666.67 because you're only 2/3rds insured.

This doesn't strike me as right. Do you have a cite?

OldGuy
08-30-2016, 10:57 AM
This doesn't strike me as right. Do you have a cite?

Here's the simplest one. It's Wiki, but still covers it.

https://en.wikipedia.org/wiki/Condition_of_average

Tired and Cranky
08-30-2016, 11:07 AM
Thanks OldGuy. This is the first time I've heard of this concept. I think I would have noticed when I got my homeowner's policy if this was one of its conditions but I'll review my policy to make sure it isn't.

Mangetout
08-30-2016, 11:08 AM
I have no idea if it works for over-insurance by value within a single policy, but I know of cases where duplication of cover resulted in the insurer refunding all the premium payments for the duplicate policy.

I think it was on the basis that, since it's illegal to claim on two overlapping policies for the same insured event/outcome, the insurer could be argued as being party to fraud for entertaining the duplicate policy - therefore, refunding the premiums means you never were insured.

Procrustus
08-30-2016, 11:21 AM
Thanks OldGuy. This is the first time I've heard of this concept. I think I would have noticed when I got my homeowner's policy if this was one of its conditions but I'll review my policy to make sure it isn't.

Most U.S. homeowner policies that I have seen (and I have seen a lot of them) pay up to the amount of the policy, even if the value of the home is more than the policy. They don't allow pro rata reduction because the home was underinsured. Many homes are underinsured. (I had to bump my own policy up about 40% after some upgrades and remodels.)

Procrustus
08-30-2016, 11:26 AM
I have no idea if it works for over-insurance by value within a single policy, but I know of cases where duplication of cover resulted in the insurer refunding all the premium payments for the duplicate policy.

I think it was on the basis that, since it's illegal to claim on two overlapping policies for the same insured event/outcome, the insurer could be argued as being party to fraud for entertaining the duplicate policy - therefore, refunding the premiums means you never were insured.

Nitpick, it's not "illegal" to have two overlapping policies on the same property. I had a client, for example, who had two $4.5M policies on his home, one old one that was near the end of the term, so he bought a new one with a different company. As luck would have it, his house burned down during the period where both policies were in force. Since $4.5M wasn't sufficient to rebuild the residence, he was able to stack the policies for additional coverage. If he had failed to disclose the first policies when he bought the second, I suppose the second company could have claimed fraud and tried to rescind the policy.

Tired and Cranky
08-30-2016, 11:26 AM
I have no idea if it works for over-insurance by value within a single policy, but I know of cases where duplication of cover resulted in the insurer refunding all the premium payments for the duplicate policy.

I think it was on the basis that, since it's illegal to claim on two overlapping policies for the same insured event/outcome, the insurer could be argued as being party to fraud for entertaining the duplicate policy - therefore, refunding the premiums means you never were insured.

I'm not really an insurance person (as my question above shows) but the issue here might be that if you have one policy that covers the whole value of your property, you have no insurable interest for the second policy to cover. My homeowner's policy (1) requires me to disclose if I have another policy and (2) doesn't cover me to the extent that the first policy covers my losses. It's not really a fraud issue; I can fully and accurately disclose that other policy and I still won't be covered.

TriPolar
08-30-2016, 11:48 AM
I'd like to find out about the effect of inflation on insurance. My home is worth considerably more than I paid for it now. Originally it was worth more than I paid for it in terms of replacement cost, the mortgage company required me to take out insurance for the replacement cost at that time, now 20 years ago. The replacement cost is now substantially higher than that. Should I be increasing my coverage?

It's not a matter of simply replacing with a structure with the same square footage if it were to burn down, it's a log cabin made of white cedar, the materials alone would be very expensive. If anything were to happen (punfully knocking on wood) I don't want to be replacing this with some cheap stick built house made of wood chips and glue.

kanicbird
08-30-2016, 11:49 AM
I have no idea if it works for over-insurance by value within a single policy, but I know of cases where duplication of cover resulted in the insurer refunding all the premium payments for the duplicate policy.

I think it was on the basis that, since it's illegal to claim on two overlapping policies for the same insured event/outcome, the insurer could be argued as being party to fraud for entertaining the duplicate policy - therefore, refunding the premiums means you never were insured.

I had the 2 policy double coverage for a short time during a overlapping switch to another company. The first company made sure they refunded everything back to the start date of the second policy stating that double coverage is not allowed and they must do this.

Ann Hedonia
08-30-2016, 12:04 PM
When my family home burnt down, the insurance adjuster determined that we were underinsured on the structure. This meant that we were paid the full value of the policy with no restrictions on how the money was used ( we did not have to rebuild - if we had not been "underinsured" they would have paid us only the actual cost of rebuilding.)

For many reasons, we decided not to rebuild - we purchased a brand new and slightly smaller house that was a better fit for my aging mother. We had a substantial amount of money left over. Plus, we sold the burnt-out shell to someone that wanted to rebuild.

They rebuilt. They SOLD the rebuilt house for an amount that was substantially less than our insurance payout. I do not feel our house was really underinsured, we just had a good adjuster.

ftg
08-30-2016, 12:21 PM
Our neighbor's house was destroyed in a fire. Their insurance stated they'd rebuild a replacement home. And they did. (They made some adjustments in the rebuilding so that it's better in some ways. They had to pay for those.)

This was such a good idea that we switched ours to replacement value as well.

So, there is no actual amount stated in the policy for the whole house. If it gets destroyed, we get our house back (just newer, of course). The premiums adjust for the rebuilding cost of our house changing based on the usual mix of things.

(As usual, you have to pay attention to rising premiums due to their business model. They start you off low and bump up all the time until you can save a noticeable amount switching to another company. We're doing that now with our car insurance.)

dracoi
08-30-2016, 02:02 PM
I'd like to find out about the effect of inflation on insurance. My home is worth considerably more than I paid for it now. Originally it was worth more than I paid for it in terms of replacement cost, the mortgage company required me to take out insurance for the replacement cost at that time, now 20 years ago. The replacement cost is now substantially higher than that. Should I be increasing my coverage?

It's not a matter of simply replacing with a structure with the same square footage if it were to burn down, it's a log cabin made of white cedar, the materials alone would be very expensive. If anything were to happen (punfully knocking on wood) I don't want to be replacing this with some cheap stick built house made of wood chips and glue.

This would be a question for your insurance agent. A mortgage company will be happy with any policy that protects their interest (either by replacing the house with something worth as much as the mortgage, or by paying off the mortgage).

I know that my policy adjusts the replacement value for inflation, but I'm pretty sure that was an option we chose and not the automatic way. Even then, construction labor and material costs don't necessarily track inflation, so revisiting the value of the home and the value stated on your policy are both good ideas.

md2000
08-30-2016, 03:12 PM
The WTC was insured for the value of one tower. What are the odds both towers would be destroyed in the same incident? In fact, the owner tried to argue that two aircraft collisions constituted two separate incidents so he should collect twice. He lost that case and only collected on the value of one tower.

Si Amigo
08-30-2016, 04:35 PM
The WTC was insured for the value of one tower. What are the odds both towers would be destroyed in the same incident? In fact, the owner tried to argue that two aircraft collisions constituted two separate incidents so he should collect twice. He lost that case and only collected on the value of one tower.

Really? (http://www.whatreallyhappened.com/WRHARTICLES/silverstein.html) Sounds like he made a tidy profit and got rid of an abestos ladden set of buildings.

chorpler
08-30-2016, 06:45 PM
Really? (http://www.whatreallyhappened.com/WRHARTICLES/silverstein.html) Sounds like he made a tidy profit and got rid of an abestos ladden set of buildings.

I really hope nobody seriously believes Michael Rivero's website has any credibility at all on this issue.

Rick
08-30-2016, 07:13 PM
This doesn't strike me as right. Do you have a cite?


Look up the co-insurance clause in your homeowner's policy. Basically it says if you don't maintain at least 80% insurance to replacement cost you are self insuring for all losses, not just total losses.
Example:
Your house has a $200K replacement cost. You decide the odds of a total loss are slim and to save money you insure for $100K.
You suffer a $20K loss.
The insurance says you are self insuring for 50% of a total loss, so you are also insuring 50% of your partial loss. Here is your $10K. Have a nice day.
A number of insurance companies offer guaranteed replacement if you insure to value. So if inflation runs wild they might have to pay above policy limits.

actualliberalnotoneofthose
08-30-2016, 09:40 PM
Insurance companies will not pay out one dime more than the policy limits. So if you have a home under insured you are out of luck. If there is a lien holder they get paid first.

So, if my house is destroyed, instead of paying to rebuild the house they would pay off the mortgage? I would have a paid off lot with no house?

Dereknocue67
08-31-2016, 04:15 AM
So, if my house is destroyed, instead of paying to rebuild the house they would pay off the mortgage? I would have a paid off lot with no house?

A two party check naming the mortgagee/mortgagor is issued for either the amount of loss or policy limits, whichever is less. Depending upon the language in your mortgage agreement, the mortgagee may have the option of applying all or part of the funds toward the balance of the mortgage. Mortgage companies however, seldom do that because they will make money on future interest payments.

Usually, once you receive the two party check, you endorse it over to the mortgage company and once they verify you will rebuild/repair the structure, they make periodic time payments back to you based on the percentage of completion and you use that money to pay the contractor making the repair.

In my 30+ years in insurance, I have seen only one instance involving a mortgagee threatening to apply the insurance proceeds toward the mortgage. That case involved a homeowner having thoughts of rebuilding the destroyed structure with a smaller structure and had thoughts to pocket the difference. Obviously, the mortgage company wanting to protect its monetary interest, said no and either rebuild with a similar structure or we will apply the insurance check to the balance on the mortgage owed to us. The homeowner complied.

Orwell
08-31-2016, 09:52 AM
Look up the co-insurance clause in your homeowner's policy. Basically it says if you don't maintain at least 80% insurance to replacement cost you are self insuring for all losses, not just total losses.
Example:
Your house has a $200K replacement cost. You decide the odds of a total loss are slim and to save money you insure for $100K.
You suffer a $20K loss.
The insurance says you are self insuring for 50% of a total loss, so you are also insuring 50% of your partial loss. Here is your $10K. Have a nice day.
A number of insurance companies offer guaranteed replacement if you insure to value. So if inflation runs wild they might have to pay above policy limits.

I'm on my third insurance policy for my house, and have shopped around at at least five other places, and every agent has told me about co-insurance, and why I need to insure for the full replacement cost. The issue I have is that I would never build a house this large (and expensive) in this location, or anywhere else for that matter, if my house burnt down. I don't want as much insurance as I have, but I am always told I need to have enough coverage to get close to rebuilding what I have, or the insurance company will consider that I don't have enough coverage and will only pay me a percentage of any loss.

I currently have $700,000 coverage, but if the house burned down, I would likely construct a much smaller house that would cost maybe $300,000 to build. I have asked what happens to the other $400k I've been paying premiums on, and I don't get a clear answer. I've also asked could I build two houses totaling the square footage of my current house, using up the $700k coverage, and I don't get a clear answer. I just feel that I'm paying for twice the coverage I really want, but can't lower the coverage because then I'd be self insuring and only get paid partially if there was a loss that wasn't a total loss.

TriPolar
08-31-2016, 10:02 AM
This would be a question for your insurance agent. A mortgage company will be happy with any policy that protects their interest (either by replacing the house with something worth as much as the mortgage, or by paying off the mortgage).

I know that my policy adjusts the replacement value for inflation, but I'm pretty sure that was an option we chose and not the automatic way. Even then, construction labor and material costs don't necessarily track inflation, so revisiting the value of the home and the value stated on your policy are both good ideas.

When I bought the house my primary concern was getting a good deal on the mortgage. I'm going to look into inflation adjustment.

OldGuy
08-31-2016, 11:00 AM
I currently have $700,000 coverage, but if the house burned down, I would likely construct a much smaller house that would cost maybe $300,000 to build. I have asked what happens to the other $400k I've been paying premiums on, and I don't get a clear answer. I've also asked could I build two houses totaling the square footage of my current house, using up the $700k coverage, and I don't get a clear answer. I just feel that I'm paying for twice the coverage I really want, but can't lower the coverage because then I'd be self insuring and only get paid partially if there was a loss that wasn't a total loss.


Look at Dereknocue67's post just above yours to see why. Whoever holds your mortgage wants a house worth at least as much as the mortgage balance as collateral. An insurance company can't really tell you what the bank might allow if you want a smaller house, so they won't give you a complete answer. I'd be surprised you'd have a problem if you owned your house free and clear of a mortgage.

However, if your home is insured for $700K and burns down completely but only costs $500K to replace the whole thing (and remember part of the value of your house is the land it's sitting on -- in some cases a huge fraction), the insurance company is only going to pay you enough to rebuild whether you do or not. The foundation might well be intact and less costly house might be smaller and use a smaller foundation. The insurance company could well balk at treating that as part of the cost.

Tired and Cranky
08-31-2016, 11:40 AM
I currently have $700,000 coverage, but if the house burned down, I would likely construct a much smaller house that would cost maybe $300,000 to build. I have asked what happens to the other $400k I've been paying premiums on, and I don't get a clear answer. I've also asked could I build two houses totaling the square footage of my current house, using up the $700k coverage, and I don't get a clear answer. I just feel that I'm paying for twice the coverage I really want, but can't lower the coverage because then I'd be self insuring and only get paid partially if there was a loss that wasn't a total loss.

I have no experience with this, personal or professional, but I'd imagine a couple things might happen. First, your mortgage likely carries a provision that will allow the mortgagor to apply the proceeds from any insurance policy to the balance of the mortgage. If you have a $700,000 mortgage and you collect $700,000 from your insurance in a total loss, you now have a lot with no encumbrances. If you are so inclined, you can build whatever you want on it. You can finance it by mortgaging the lot and/or getting a construction loan if you so desire. When the smaller house is finished, you can refinance into a permanent mortgage on the value of the smaller home and lot.

Second, under the terms of my mortgage or insurance policy (I forget which and I don't feel like checking the documents), I will receive the insurance proceeds for a complete loss only as I rebuild. I think I get a quarter up front, and as each of the first three quarters are finished, I get the next quarter of the money. This suggests another route to your goal -- negotiating with your mortgage company to allow you to build the smaller, less expensive home as long as the loan-to-value ratio stays the same. This might mean you spend roughly half the insurance payout on the new house and the remaining half to pay down the mortgage. The mortgage company has a smaller but still appropriately collateralized mortgage and you have the smaller house of your dreams. I'm not certain this could be done but it seems reasonable for all parties.

md2000
08-31-2016, 12:52 PM
Oldguy is right. The insurer only pays for damages. If you have a house that costs $500,000 to rebuild on a lot worth as land $200,000 then you only get the $500,000 to replace the house. It's no different than your car in an accident. I.e. they pay for the damages if it's less than the write-off value. If there's a dispute, ultimately the court will decide the value. And like your car, if the bank owns a part of your house (mortgage / lien) they get paid in full before you get any cash free and clear.

Keep in mind, in a complete write-off, there's also the cost of hauling away he debris and cleaning up so you may end up with the value of the dead building plus clean-up costs if you choose not to replace it. Then if you choose to replace with a smaller building or a miniputt golf course or a Japanese Garden, that is up to you.

Insurance ultimately is to pay the stake-holders for the amount of their loss.

sitchensis
08-31-2016, 01:07 PM
I'm on my third insurance policy for my house, and have shopped around at at least five other places, and every agent has told me about co-insurance, and why I need to insure for the full replacement cost. The issue I have is that I would never build a house this large (and expensive) in this location, or anywhere else for that matter, if my house burnt down. I don't want as much insurance as I have, but I am always told I need to have enough coverage to get close to rebuilding what I have, or the insurance company will consider that I don't have enough coverage and will only pay me a percentage of any loss.

I currently have $700,000 coverage, but if the house burned down, I would likely construct a much smaller house that would cost maybe $300,000 to build. I have asked what happens to the other $400k I've been paying premiums on, and I don't get a clear answer. I've also asked could I build two houses totaling the square footage of my current house, using up the $700k coverage, and I don't get a clear answer. I just feel that I'm paying for twice the coverage I really want, but can't lower the coverage because then I'd be self insuring and only get paid partially if there was a loss that wasn't a total loss.

Sell your house and buy the house you want.

Orwell
08-31-2016, 01:55 PM
Sell your house and buy the house you want.

I plan to do that, eventually. But, in the meantime, I am paying for twice as much insurance as I want.

And, to respond to previous messages, my mortgage is pretty much irrelevant, as I owe much less than the property is worth, and even less than the cost to rebuild. Yes, the market value of the property as-is (including the land) is less than the cost to rebuild the house, as my house is an over-improvement for the neighborhood. The house is twice the size it should be, given the location. The land is also not a factor in my query. I know insurance doesn't pay for land, which isn't destroyed.

Oddball_92
08-31-2016, 07:30 PM
I currently have $700,000 coverage, but if the house burned down, I would likely construct a much smaller house that would cost maybe $300,000 to build. I have asked what happens to the other $400k I've been paying premiums on, and I don't get a clear answer. I've also asked could I build two houses totaling the square footage of my current house, using up the $700k coverage, and I don't get a clear answer. I just feel that I'm paying for twice the coverage I really want, but can't lower the coverage because then I'd be self insuring and only get paid partially if there was a loss that wasn't a total loss.

You premiums are for replacing what you lose up to (in your case) $700K. Insurance companies are not going to just write you a check for $700K. They will pay out in draws to the contractor as the new house is being built. If you decide to build a $300K house that is all they are going to pay. One reason for this is to quell the incentive for someone to deliberately burn their house in order to pocket (in your case) $400K. As a former fire/arson investigator I have seen that tried many times. Your best bet would be to just rebuild your house comparable to what you had then sell it for $700K. Then you could build a $300K house and keep the difference.

Napier
09-02-2016, 04:42 PM
The investigation marches on. I've heard a few subtitles about these things and am trying to collect them all for good comparison purposes.

But I had a grand time talking to several companies, and got quotes for 4 to 6 different arrangements from each company. They all have some approach for figuring out "Coverage A" for replacing the dwelling, and several of them are clustered within a few percent of one another, which is reassuring. So I got quotes based on that amount and on around 10% more. But I also went with deductibles from 250 to 2500. I have most of the combinations, from each company.

Then I did a linear model with company as a class variable, and got an r^2 of somewhat better than 0.99. With premiums ranging from the 400s to the 1400s, the model predicts the premium within around $10. It says that the insurance company prices vary by around 400, and there are proportional effects of dwelling amount and deductible amount.

Now I gotta find ratings for the companies in terms of how they keep up their end of the bargain when disaster hits.

Ann Hedonia
09-03-2016, 05:28 PM
You premiums are for replacing what you lose up to (in your case) $700K. Insurance companies are not going to just write you a check for $700K. They will pay out in draws to the contractor as the new house is being built. If you decide to build a $300K house that is all they are going to pay. One reason for this is to quell the incentive for someone to deliberately burn their house in order to pocket (in your case) $400K. As a former fire/arson investigator I have seen that tried many times. Your best bet would be to just rebuild your house comparable to what you had then sell it for $700K. Then you could build a $300K house and keep the difference.

That's so different from what happened to my family. House burned down- half gutted, other half pretty much ruined by smoke and water damage. The house ( structure) was insured for what ultimately turned out to be around $265K.

I think the face value of the policy was somewhat lower, but there were allowances for code upgrades, debris removal, that got tacked onto the face value of the policy.

I'm not sure what metric the insurance agent used to value the cost of replacing the house but it seemed to involve pricing every inch of building materials as well as every hinge, doorknob , light fixture, etc,etc, etc.

She came up with a replacement value of 275K. A fair market value on the house before the incident would have been 200K, ( + or- 20K), based on lots of good comps.

So the upshot was that we were deemed to be "underinsured" and therefore all we were getting was a check for 265K which we could use however we wanted.

We bought another house for around 200K. We sold the burnt house and the land for about 30K. It was eventually replaced with a house that is under contract for 215K.

Living expenses were a separate allowance of 40K most of which we got as reimbursement for temp housing and other expenses. House contents were a different part of the policy, we got about 90K for the depreciated value and we will get more once we get around to sending in receipts - we have a few years to get this done, though.

I felt we were very well taken care of.