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?
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.
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
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.
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.
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.
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.
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.
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.)
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.
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.
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.
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.
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.
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.)
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.
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.