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HO Insurance - Replacement Cost Logic
Old 12-10-2018, 12:05 PM   #1
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HO Insurance - Replacement Cost Logic

DW and I recently bought our "retirement home"and today we received the insurance company's estimate of the new homes "replacement cost".

This has got me thinking about the appropriateness of the replacement cost approach to homeowner's insurance.

In our current home, I think that it makes perfect sense. We live in a nice enough tract house built in the 1960's. In this community (DC metro), much of the value lies in the land, so the cost to rebuild the house would be less than the cost to buy an existing, similar home. So, it seems that insuring for replacement cost makes sense. Plus, we have no particular attachment to the house, every 3rd house in the neighborhood has this floor plan.

However, in our soon-to-be new community, we bought a beautiful 110 year old home for about 1/2 the insurance company's estimated replacement cost. If this home were totally lost to fire, for instance, it would be much cheaper to purchase an existing home of equal quality (and there are several that would be available) than to build a replacement.

Plus, even if they built the replacement, would they really replace all the plaster, the inlay parquet floor, fireplaces, etc. with work of equal quality? Even if they did, would this new construction carry the same emotional connection for us that the original home did? The uniqueness and history of the home carries some weight with us.

So, anyway, I'm not totally sure what question I'm asking, but the concept of "replacement cost" seems flawed in this type of environment. At one level, there is the financial question, "What is the appropriate amount of coverage to carry?" But there is also the question of what is the purpose of homeowner's insurance? Is it to provide comparable living quarters? If so, then in some instances replacement cost seems to be an inappropriate measure.

What do you all think?
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Old 12-10-2018, 12:38 PM   #2
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Some, if not all HO insurance policies don't pay for you to walk away and purchase another home. It pays to rebuild your house with similar level of amenities. And to meet current building codes, which a 110 yr old home certainly doesn't meet. Insurance policies vary. Make sure the walk-away is an option if that is your preference. it may pay to have an independent expert read and interpret your policy. Your agent's verbal answer may or may not be correct and certainly will not stand up if a lawsuit is necessary.


I am not an agent. This is what my agent told me.
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HO Insurance - Replacement Cost Logic
Old 12-10-2018, 02:40 PM   #3
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HO Insurance - Replacement Cost Logic

I think you have the right approach to analyze coverage details and determine what makes sense in your situation. When insurance was cheap all sorts of extravagant coverages get added in and it’s OK since the cost is minimal. When premiums rise as they have the past few years its too expensive to pay for things that are not needed. Replacement cost does seem extravagant in areas where the value is in the lot but one thing that does get overlooked is demo cost that may make rebuilding more expensive than buying a similar house. My auto coverage jumped up so I looked closely at the details and noticed “pet medical coverage” for the 1st time. We don’t have pets! Broker says all insurance cos will be jacking up rates due to high level of claims payments.
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Old 12-10-2018, 05:03 PM   #4
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I just had my new home insured and it wasn't insured enough to cover the mortgage (which was a requirement of the mortgage)... so I told him what it needed to be insured for and thats what I paid. They will only pay out enough to rebuild but in the end I know I'm covered as I thought the re-build quote they used was extremely low.


He talked about does my house have standard kitchen (ie a new build with granite, stainless steel appliances, etc), but lets face it that measurement means nothing. They have no idea what size the kitchen is, how many cabinets there are, how much granite there is, and if the appliances are the bottom of the line or top of the line. I've remodeled kitchens for $15k and for $50k so their calculations in many ways are just as meaningless for new builds and your older home.
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Old 12-10-2018, 06:25 PM   #5
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JJ, I get ripped off from every insurer on what I have to ensure home for. I gave up,after arguing with everyone and losing every time. Its padded legal ripoff profits. My house could burn to the ground and pay for all debris removed and rebuild to exact specs and I still wouldn’t come close to touching the over amount I have to pay.
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Old 12-10-2018, 08:21 PM   #6
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JJ, I get ripped off from every insurer on what I have to ensure home for. I gave up,after arguing with everyone and losing every time. Its padded legal ripoff profits. My house could burn to the ground and pay for all debris removed and rebuild to exact specs and I still wouldn’t come close to touching the over amount I have to pay.
I have exactly the opposite problem. Quotes to rebuild tract houses after the fire up in Santa Rosa have been coming in at $450 a square foot and higher. I can't insure my house for anywhere near that amount. Despite the "replacement cost" verbiage in the policy, I worry that the house is under insured if there is a similar fire here, an even higher construction cost market.
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Old 12-10-2018, 08:39 PM   #7
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I lost my home to a wild land fire several years ago. Thank GOD I had replacement value insurance on my home. My home and land was valued at $525,000. The house at $250,000. I eventually recovered $325,000 for the house to be replaced. Then there were the other things on the policy; landscaping, contents, personal property, other improvements, etc. Altogether I was paid slightly over $600,000 for my loss. Remember, all the other coverages I mentioned are based on the home's value. For example; contents coverage is 70% of the home's value. My home's value was $250,000, so I was paid $175,000 for it's contents. Landscaping was 20% of home value. Other improvements included stuff like driveways, fencing, outbuildings, etc and was weighted at 10% of home's value. I had my cars and other property that require separate policies covered by the same company and lost all that stuff too. Because I lost all those things and they were covered by the one company, the policy stipulated an additional 5% payout of the policy total. Some things most people do not consider after a catastrophic fire;
First, you are left with a mess that needs to be cleaned up. No one in government is going to allow you to just walk away from that either. For me, I first had to put in drainage control so that the burned debris would not be washed off into drainage and pollute water. This involved straw, waddles, fencing, etc. Then there was the actual hauling away of the debris. Nothing is ever sent to land fills anymore and most especially from a fire where there are many hazardous materials; lead from car batteries for example. I had 5 of those large dump bins for everything from steel to concrete. Each cost money to rent and have delivered. Then there's the labor to load them up. As hazardous waste, laws mandate how it's handled. The workers had to wear haz-mat suits. Then there's the hauling away to the recycling sites and the fees they require to take all that mess.

I was on a hillside. The fire destroyed the trees and their removal, mandated by the fire marshal to be done within 3 months or start being charged penalties. Removal of the trees destabilized the soil, so I had to hire a soil engineer to do compaction studies and earth movers to compact the soil again.

Then there are the permits and building fees for the new house. In the end, a house valued at $250,000 cost over $325,000 to replace. To completely recover all the insured loss, I spent about $50,000 over what my policy covered; about $650,000. So a $250,000 house is not going to just cost $250,000 to replace. Not by a long shot.

Always insure a home for what it cost to replace it, not what it's worth or you'll be woefully short on funds. What it cost to build a neighborhood, per house, is a lot less than building just one home. Even though the home is just like all the others, it's still a custom home because of the conservation of resources when building several homes at once.

My insurance company came through with flying colors. They could care less what features my home had; granite, wood floors, etc. All they cared about was it's appraisal value and the amount of coverage I had. They didn't care what it would actually cost me to rebuild unless it was less than the policy coverage. I could rebuild anything I wanted to with the money. I played general contractor, engineer, architect and draftsman, saving me some money to put towards upgrades. I ended up building a 2800 square foot log style home from what had been a 1200 sq. ft. spec house. My fire hit at the peak of the housing bubble in California and when I rebuilt, contractors were begging for work and material costs fell though the floor. When I was finished, I had the house market analyzed. (Different than an appraisal) I was told I could list and most likely be able to sell it for $300,000 inclusive of the land, that's how far prices had fallen. So that's another reason to insure for replacement costs; you never know where you'll be in a market cycle when the disaster hits and the rebuilding takes place.
Right now, I'm insured for about 20% more than replacement costs. I do not want to be caught short if housing values go up quickly. Evaluate your home's value each year and stay ahead of what it costs. Sure, I pay more than I would if I priced my insurance closer to it's actual value, but then I could be caught short too. Believe me, if my policy costs doubled, I'd still be ahead of the game, cost-wise, compared to what my home would now cost to replace.

And just to be clear; over insuring doesn't mean you'll be over paid either. The insurance company will do a through audit and appraisal of what the home could have sold for if the disaster had not occurred. The policy total value padding is just so I am assured I'm fully covered and without question.
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Old 12-10-2018, 11:26 PM   #8
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I have exactly the opposite problem. Quotes to rebuild tract houses after the fire up in Santa Rosa have been coming in at $450 a square foot and higher. I can't insure my house for anywhere near that amount. Despite the "replacement cost" verbiage in the policy, I worry that the house is under insured if there is a similar fire here, an even higher construction cost market.
Exactly, during a large scale disaster, there is a severe shortage of skilled workers, so they go for the highest bidder.
Then there will be the scam ripoff repair fellows who seem reasonable, but don't show up to do the job after collecting a down payment from lots of people.
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Old 12-11-2018, 05:25 AM   #9
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A number of the 13,000 +/- houses up in Paradise that burned down were not insured and the current owners will not rebuild. Fire insurance is expensive up there because of the risk and a lot of older people with paid off homes could not afford it. FEMA will not be of much help to those people. When it is rebuilt, Paradise will look very different than it did before the Camp Fire.

Insuring your home is relatively cheap in most places. Given the cost to rebuild, it's worth it to insure liberally and for full replacement cost.
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Old 12-11-2018, 10:43 AM   #10
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I lost my home to a wild land fire several years ago. Thank GOD I had replacement value insurance on my home. ...
Thank you for sharing so much detail in what you had to deal with after a catastrophic loss, it is insightful and should be helpful to folks now and in the future.

We recently bought what might be our "forever retirement" home and had a great deal of fun (can you smell the sarcasm?) with the insurance quotes. All of them valued the replacement costs significantly higher than what we paid for it, but I can see where they come from.

We were initially going to build, but it became very apparent that it was going to cost a good chunk of change *more* that if we bought pre-existing. As a matter of fact, the house we ultimately bought would cost in the neighborhood of $80K-$100K more to build that what we paid for it. It was a custom built home that has some upgrades that I wouldn't have even known that exist and that I wouldn't have paid for if building from scratch. There are a lot a variables of course and in our case, it was a desperate seller, a softening RE market, building material cost increases...well, you get the point.

Ultimately we insured for $75K over what we paid but not the increased $120K value the insurance company put on the house. It's the most we have ever paid for homeowner's insurance, but it will help me sleep a little better at night.

Oh, as an aside...there was a comment that insurance companies "don't know" how your house was built/etc. Well, I can tell you that while I was talking to the Amica rep, she had access to the pictures that *had* been on the MLS (were removed the day after we had a binding contract) and knew a lot more about the house than I would have thought. So...don't assume that they are that "in the dark".
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Old 12-11-2018, 01:56 PM   #11
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Thank you for sharing so much detail in what you had to deal with after a catastrophic loss, it is insightful and should be helpful to folks now and in the future.


You are welcome. Since our fire, I've volunteered to speak to fire victims who are in the initial stages of a catastrophic loss. I've been able to help many understand their policy and what is covered. Just one example;
Loss-Of-Use. Most policies have a LOU clause. It covers the time between the fire and when the final check is cut. So, we lost everything and were given a rental house, fully furnished right down to the toilet paper on the roll. The cost didn't come out of building funds either. There is no dollar limit. If a rental of a replacement 3bed/2bath is $2,000, then they pay that. If the furnishing rental is another $500 a month, they pay that. If the electric bill is $50 more than you can show on your historical bills, they pay that. If you lost your fishing boat (actually happened to me) and it was destroyed at your house, it's personal property and it's covered under LOU. Just take a charter fishing trip and the cost is covered. If the rental has a yard and landscaping, but you don't have lawn care tools, a lawn care business can be hired to do the work and the cost is covered. Many insurance companies won't sit down and explain what is covered and most victims of fires wouldn't even think that some of the costs would be, but the litmus is this; if you are paying more than you would have living in your house before the disaster, then it's covered for the difference under LOU most likely.

Read your policies folks. KNOW what is in there and your coverage. A policy that you think covers the value of it's home sitting on the land is just the tip of the iceberg when you suffer a loss like this. I can't imagine what my insurance company paid for the rental (most policies are up to two years) on top of everything else they covered as I didn't keep track, but it had to be at least another $100,000 over the total value of checks they wrote me.
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Old 12-11-2018, 02:11 PM   #12
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Oh, as an aside...there was a comment that insurance companies "don't know" how your house was built/etc. Well, I can tell you that while I was talking to the Amica rep, she had access to the pictures that *had* been on the MLS (were removed the day after we had a binding contract) and knew a lot more about the house than I would have thought. So...don't assume that they are that "in the dark".
The BEST advice I can give anyone experiencing filing a claim of any amount with any insurance company is this;
DO NOT LIE !!

No, not one little white lie. Be totally honest, truthful and hold back nothing. I can guarantee you that, if caught, you will have to fight for every nickle you are due. I was totally honest with my insurance adjuster. I told him a lot more than he ever wanted or needed to hear and know. In return, he told me what I needed to know as well. For example; a fire of the type that wiped out my home and those recently in California; if you are on a septic system, it's destroyed. How can that be?! It's under ground! Well, just wait for all those trees to be removed and the huge excavators come in to claw up all that debris. The bull dozers used to push everything into a big pile. Not only is the tank most likely to be caved in, the leech field will be over compacted. There's no more micro organisms in the soil to break down the liquefied sewage. See? The cost is more than just the street value of the house itself when you will be educated on just exactly what it means to loose everything.

The trust relationship I had with my insurance adjuster had us as advocates, not adversaries when we worked together on the policy coverage. I never would have dreamed he would be my partner in this recovery effort, but I can't believe my own father could have done more for me if he owned the company.

If you end up with a claim and are not as fortunate to have an adjuster who understands their fiduciary partnership with you, there are companies that you can contract with who will ensure you get the limits of your coverage. One such company is The Greenspan Company. Hiring them is like sicing a pit bull on 'em. They charge 10% of the amount they collect on your behalf. I learned of them through.... my insurance adjuster! He told me if, at any time, I thought he was holding back on legit claims; either upfront or by omission, then give this company a call. All he asked was to first give him a fair chance to do his job before spending 10%.

If anyone is interested, my policy is through SAFECO. You can only get them through an insurance broker. God bless them and my adjuster.
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Old 12-11-2018, 02:15 PM   #13
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So, anyway, I'm not totally sure what question I'm asking, but the concept of "replacement cost" seems flawed in this type of environment. At one level, there is the financial question, "What is the appropriate amount of coverage to carry?" But there is also the question of what is the purpose of homeowner's insurance? Is it to provide comparable living quarters? If so, then in some instances replacement cost seems to be an inappropriate measure.

What do you all think?
I had the same question earlier this year. I like our house, but it's just a
tract home on a suburban lot. The insurance company had us insured for about 25% above the fair market value of the home (not counting the additional insurance for contents, liability etc). I called, and they told me this was their estimate to rebuild the house (long spiel -- labor costs high, demo costs big, new codes, locusts, etc). I asked why I would rebuild the house for more money than it was worth? This isn't a family farm, etc--I'd just look for another house to buy. In the end, I spoke to another individual and got the coverage knocked down appreciably ("you understand that this won't rebuild your house, right?" YES, it will let me buy another equivalent house).
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Old 12-11-2018, 02:38 PM   #14
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Thanks to everyone, especially skipro33. Homeowner's insurance is clearly a LOT more complicated than I have naively been believing these past 35 years. Reading the policy is clearly the first step but information, such as skipro33 has so generously shared, is incredibly important for placing the contract language into context. Thanks again, everyone. I'll spend some time wading through the policy and then, if appropriate, I'll talk to an agent about coverage adjustments.
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Old 12-11-2018, 02:44 PM   #15
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I had the same question earlier this year. I like our house, but it's just a
tract home on a suburban lot. The insurance company had us insured for about 25% above the fair market value of the home (not counting the additional insurance for contents, liability etc). I called, and they told me this was their estimate to rebuild the house (long spiel -- labor costs high, demo costs big, new codes, locusts, etc). I asked why I would rebuild the house for more money than it was worth? This isn't a family farm, etc--I'd just look for another house to buy. In the end, I spoke to another individual and got the coverage knocked down appreciably ("you understand that this won't rebuild your house, right?" YES, it will let me buy another equivalent house).
So was mine; a spec house of insignificant design or construction. I pooled all my policy payouts; personal property, landscaping, motorcycles, RV's, boat, etc and rolled it into a replacement house. We built our log home. Maybe not practical in a suburban tract neighborhood, I'll grant, but still something to consider if your situation ever changes.

Many policies require proof that the replacement is at least comperable to the one insured. It needs to be understood, this is not a buy-out. It's not like a car that's been totaled in a wreck where a check is handed you for the bluebook value. If you are offered a cash settlement, and that's a big if, watch out for what they consider the policy limit since the entire structure wasn't insured for full replacement value. They may just interpret their policy to mean that they will only ever cover whatever percentage your policy does cover, not a max dollar amount. If insured for 75% of replacement cost for example and that totaled enough to buy a comp house someplace else, they may just limit to 75% of the comp house.

Also, they may consider this a 25% deductible. My home's policy is a $5,000 deductible. Any claim, the first $5K I pay out of my pocket. Your home policy isn't for a total loss, it's for UP TO a total loss. If, say, your hot water heater ruptured and caused $25,000 in damage and your home is insured for 75% of it's actual replacement value, worth, say $100,000. You may not reach the point past your new deductible. I'm not saying that's how your policy reads, what I'm saying is that the insurance company may have an argument for not paying. That could force you to court or a settlement. Neither of which you are going to be happy about.

I seriously counsel anyone to be absolutely sure the language in the contract spells out EXACTLY what you intend to do if you are faced with the loss. Nothing is ever left to interpretation or "as it was explained to me". No sir! A judge, maybe two years down the road when your case against the insurance company comes before him is going to go by the legal interpretation of the language above the signature and nothing else. Legal language has almost nothing in comparison to common sense language. Be warned!
For me, the rebuild was financially more favorable on a few accounts;
1. Once completed, the house will sell for more than any other in the neighborhood because it's up to code and it's brand new. In a neighborhood of, say, 20-year-old-homes, that can be significant.

2. If you don't rebuild, you still have the mess to clean up before you can sell the land.

3. It's hard to sell land that has had fire on it because of the fear of soil contamination, or even just bad mojo. You have to fully declare anything about the property, so no getting away from not disclosing.
4. In order to buy another home, you'll have to sell that land. The insurance covered the house on the land, they won't give you the full appraisal of the entire property.

5. In some parts of the country, California for example, property taxes are capped year to year so a long time home owner pays less in property taxes than a new home owner. A rebuilt house preserves the original property taxes, whereas another home someplace else will trigger a reassessment of the property tax. This could be thousands of dollars a year alone.

I'm sure there are more, but in the long run, look at it as a business venture and an opportunity to either resell the existing structure with a full and free remodel if you don't want to live there any more, or the chance to rebuild a home in a community you consider your retirement place with many many years of maintenance free hassles. After all, everything from the water heater to the dishwasher will be new. Every electrical wire, switch, light bulb even.
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Old 12-11-2018, 02:49 PM   #16
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I'm seeing a lot of inefficiencies in the insurance process here. I wish I had a way to capitalize on those. The premiums are certainly benefiting a few while not accurately assigning risk.
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Old 12-11-2018, 05:02 PM   #17
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I had the same question earlier this year. I like our house, but it's just a
tract home on a suburban lot. The insurance company had us insured for about 25% above the fair market value of the home (not counting the additional insurance for contents, liability etc). I called, and they told me this was their estimate to rebuild the house (long spiel -- labor costs high, demo costs big, new codes, locusts, etc). I asked why I would rebuild the house for more money than it was worth?
One reason is that what a house is worth represents the house as an X years old house. If my house burns down, I am going to build a new house and even if it was built identically to my old house the new house would be worth more because it is 30 years newer than my existing house.

I mean, sure, I could not rebuild and buy a cheaper 30 year old house somewhere. But, I live in an area where it really isn't easy to find houses like mine in this area. I had to beat out 2 other people to buy this house and it wasn't even publicly listed on MLS yet. It is just an ordinary house but there just aren't a lot of them in this area.

And after I bought the house, I really thought about the value that I had initially insured it for and I increased the amount of insurance to something closer to what I thought it would cost to rebuild.
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Old 12-11-2018, 05:49 PM   #18
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I am seeing a disconnect between the cost to replace an existing home and it's fair market value.

Actual Cash Value (replacement cost less depreciation) policies are offered, so you don't necessarily have to insure to full replacement cost value.

Replacement cost policies are just that, the cost to rebuild the home using current technology and adhering to current code, and replacing with 'like kind and quality' - including the owner improvements, such as granite counters and top of the line appliances.


What the home is worth in a real estate transaction is a completely separate issue, unrelated to making a claim for repairs. Real estate values are based on the local market for homes with the same location and qualities.



If you own a 100 year old home with great finishes, replacement cost will far exceed the market value because of the 'like kind and quality' clause. A key phrase in your insurance policy.
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Old 12-11-2018, 06:02 PM   #19
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So was mine; a spec house of insignificant design or construction. I pooled all my policy payouts; personal property, landscaping, motorcycles, RV's, boat, etc and rolled it into a replacement house. We built our log home. Maybe not practical in a suburban tract neighborhood, I'll grant, but still something to consider if your situation ever changes.

Many policies require proof that the replacement is at least comperable to the one insured. It needs to be understood, this is not a buy-out. It's not like a car that's been totaled in a wreck where a check is handed you for the bluebook value. If you are offered a cash settlement, and that's a big if, watch out for what they consider the policy limit since the entire structure wasn't insured for full replacement value. They may just interpret their policy to mean that they will only ever cover whatever percentage your policy does cover, not a max dollar amount. If insured for 75% of replacement cost for example and that totaled enough to buy a comp house someplace else, they may just limit to 75% of the comp house.

Also, they may consider this a 25% deductible. My home's policy is a $5,000 deductible. Any claim, the first $5K I pay out of my pocket. Your home policy isn't for a total loss, it's for UP TO a total loss. If, say, your hot water heater ruptured and caused $25,000 in damage and your home is insured for 75% of it's actual replacement value, worth, say $100,000. You may not reach the point past your new deductible. I'm not saying that's how your policy reads, what I'm saying is that the insurance company may have an argument for not paying. That could force you to court or a settlement. Neither of which you are going to be happy about.

I seriously counsel anyone to be absolutely sure the language in the contract spells out EXACTLY what you intend to do if you are faced with the loss. Nothing is ever left to interpretation or "as it was explained to me". No sir! A judge, maybe two years down the road when your case against the insurance company comes before him is going to go by the legal interpretation of the language above the signature and nothing else. Legal language has almost nothing in comparison to common sense language. Be warned!
For me, the rebuild was financially more favorable on a few accounts;
1. Once completed, the house will sell for more than any other in the neighborhood because it's up to code and it's brand new. In a neighborhood of, say, 20-year-old-homes, that can be significant.

2. If you don't rebuild, you still have the mess to clean up before you can sell the land.

3. It's hard to sell land that has had fire on it because of the fear of soil contamination, or even just bad mojo. You have to fully declare anything about the property, so no getting away from not disclosing.
4. In order to buy another home, you'll have to sell that land. The insurance covered the house on the land, they won't give you the full appraisal of the entire property.

5. In some parts of the country, California for example, property taxes are capped year to year so a long time home owner pays less in property taxes than a new home owner. A rebuilt house preserves the original property taxes, whereas another home someplace else will trigger a reassessment of the property tax. This could be thousands of dollars a year alone.

I'm sure there are more, but in the long run, look at it as a business venture and an opportunity to either resell the existing structure with a full and free remodel if you don't want to live there any more, or the chance to rebuild a home in a community you consider your retirement place with many many years of maintenance free hassles. After all, everything from the water heater to the dishwasher will be new. Every electrical wire, switch, light bulb even.


You have provided excellent information here. I wonder if you would consider volunteering to present this information to homeowners? The American Red Cross could really use education like this. They do a lot of fire prevention courses and I think this is an important part of preparation.
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Old 12-13-2018, 03:47 AM   #20
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A family member had a rental home burn down recently. It took 3 months (during which the ins. co. paid for lost rent), but insurance company offered to rebuild, OR, pay him cash (about 120% of the current market value). He took the cash option, cleaned off the debris (cost about $10k), then sold the lot to a neighbor. It turned out to be a very good deal for him.
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