Those may be different policies: I have separate mortgage and homeowner’s policies, for example. The mortgage policy covers whatever’s left of the mortgage at that time both in case of a personal catastrophe happening to me and in case of total destruction of the house and having it gets me a lower rate from my lender, the homeowner’s policy covers regular-sized damage to the house and contents and my bank doesn’t even know it exists. If I get flooding, I call the second insurer; if the building burns down, the first one.
Since my home is a flat, totalling the building would mean totalling 12 homes and probably involve damage to other houses nearby. Bloody mess for sure.
This is not true for some home insurance. It depends on the policy you take out. Not all policies are for replacement, e.g., for a fixed amount which might be far less than replacement due to inflation, etc.
Landlord insurance, or liability coverage for a tenant if you accidentally burn down 11 other people’s homes too, is a whole extra issue. Most home policies have coverage for personal liability - ie. if the postman slipson the ice on your walk and sues you.
(I recall in the 1970’s when Herpes hit the news, one woman successfully sued a fellow for giving her the disease and made the personal liability clause pay big time. Since then, the wording has been updated.)
Coverage insurance for loans and mortgages is often a scam - premiums are often much higher than for normal life insurance coverage.
Not disagreeing per se, but the risk of someone defaulting on a loan is arguably greater than the risk of dying unexpectedly. Therefore, a premium to cover $XXX based on default will be higher. Also, as you note, predation.
Having gone through Hurricane Ike, I don’t know a single person that had “replacement” insurance. Like many mentioned, the house gets totaled and the various insurance agencies pay the max that you are insured for (hopefully). For some that covered rebuilding and for some that didn’t.
I live in Long Beach, California, and our homeowner’s insurance is through AAA. We have what they describe as guaranteed replacement coverage: There is a nominal assessed replacement cost of the structure on which our rates are based, but they promise to pay whatever is needed to restore a loss.*
When we were shopping around (we bought in 2009) AAA made a big deal out of the guaranteed replacement clause, and they were the only folks we talked to who offered it. The Farmer’s agent I talked to actually recommended that we take AAA’s policy over the ones he could offer - citing the GRC and a pretty competitive rate.
The amount we’re insured for (that nominal value of the structure) is a heck of a lot less than the total amount we’ve borrowed, and I suspect that’s quite common out here. On our most recent property tax assessment, about 2/3 of the value of the property is the land itself (which, I’m comforted to know, we’ll still own even if the house is a pile of rubble). “Improvements” to the property (i.e., the house) are only valued at about 1/3 of the total.
Yeah, yeah, deductibles, exclusions, and what not. Point is, there’s no fixed cap on rebuilding the house at which they stop paying.
Of course, if you choose not to build, you still have to subtract from land value the cost of demolishing and removing the remains of the house - unless it floated or blew into the next county. Demolition and disposal costs are often not trivial (but nowhere near cost of rebuilding).