I really hope nobody seriously believes Michael Rivero’s website has any credibility at all on this issue.
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.
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.
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.
When I bought the house my primary concern was getting a good deal on the mortgage. I’m going to look into inflation adjustment.
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.
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.
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.
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.
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.
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.
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.