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Insure to Get a House "Totaled"?
Old 11-23-2021, 05:47 PM   #1
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Insure to Get a House "Totaled"?

We had our house custom built 40 years ago on the far fringes of suburbia, from plans DW modified, when the kids were toddlers. Now the kids are gone and the house is twice as big as we need but we still like the house, the view, and the neighborhood. We plan to live here until we choose or are forced to move to a final condo/CCRC/nursing home.

But...
Having the house built involved a huge amount time and hassle. We don't want to ever go through that again. If the house were destroyed or seriously damaged while we are still living here, probably we'd never get to live in it after all the trouble of rebuilding/repairing. The few cases I know of, it was 2-3 years before the house was ready again.

With a car, the insurance company can declare it a total loss, write you a check, and sell the damaged car to a salvage company. That doesn't normally happen with houses.

We want to eventually sell the house and move normally. But if it gets seriously damaged before we do that, is there a way to take a cash payout, even a somewhat reduced one, and let the insurance company take it from there? Our State Farm agent had no suggestions.
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Old 11-23-2021, 06:23 PM   #2
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That's the problem with a tied agent. They work for the insurance company, in this case, State Farm, and not for you, the one writing the checks. So you get only what State Farm allows them to say and do.

I suggest that you find a good independent agent to discuss your questions and strongly consider switching your coverage to a company they work with. A good independent agent will be your advocate when the SHTF, where your State Farm agent will be an apologist for State Farm.

A good careful read of your current policy may answer your questions as well. In our state, homeowner policies are standardized, so here I would also try the state Insurance Commissioner office to see if their consumer support people can advise. SGOTI, not so much.
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Old 11-23-2021, 06:34 PM   #3
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I am just SGOTI, however, my experience leads me to believe that an insurance company will work with you if it means they will pay out less money.
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Old 11-23-2021, 09:35 PM   #4
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You insure the improvements, not the land (mostly). Even if a natural disaster flattens the house, you still own the land and it still has some value and the government still expects to collect some property tax from you. You can take the insurance payout in most cases and decide not to rebuild the house, but the insurance company won't just take over the land.
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Old 11-23-2021, 09:55 PM   #5
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I have helped buyers who bought fire damaged properties. The owners got an insurance settlement and then sold. (I'm guessing the insurance company pays out less then what rebuilding would cost them so they're happy).
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Old 11-23-2021, 09:55 PM   #6
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I agree. House insurance is not like automobile insurance. In lots of cases, the land is worth more than the improvements. It's not just dirt if it has utilities and sewers.
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Old 11-23-2021, 10:42 PM   #7
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Keep full replacement value insurance on your home and make sure it also covers the costs of staying in a hotel while the work is being done. If disaster strikes, and I hope it does not, you can't go back and get the better insurance.

My house was under contract when there was a massive internal flood. Required asbestos abatement, mold remediation, testing, inspections; floors and walls were ripped out and most of the house was down to the studs. And no, it did not take 2-3 years to remediate.

The work had to be done; you just can't let a house become (and remain) a biohazardous toxic dump - which apparently it can and rather quickly.

And no, the insurance company did not just say here's a check for the (depreciated) value of your home we'll take this off wreck off your hands and take care of everything; although possibly you could get a money towards repairs and a cash buyer who would be interested in flipping the house.
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Old 11-24-2021, 07:50 AM   #8
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Quote:
Originally Posted by Gearhead Jim View Post
We had our house custom built 40 years ago on the far fringes of suburbia, from plans DW modified, when the kids were toddlers. Now the kids are gone and the house is twice as big as we need but we still like the house, the view, and the neighborhood. We plan to live here until we choose or are forced to move to a final condo/CCRC/nursing home.

But...
Having the house built involved a huge amount time and hassle. We don't want to ever go through that again. If the house were destroyed or seriously damaged while we are still living here, probably we'd never get to live in it after all the trouble of rebuilding/repairing. The few cases I know of, it was 2-3 years before the house was ready again.

With a car, the insurance company can declare it a total loss, write you a check, and sell the damaged car to a salvage company. That doesn't normally happen with houses.

We want to eventually sell the house and move normally. But if it gets seriously damaged before we do that, is there a way to take a cash payout, even a somewhat reduced one, and let the insurance company take it from there? Our State Farm agent had no suggestions.
I think the only way that works is for you to collect the insurance claim and then sell the remains "as-is". Even then, you probably wouldn't end up with the value of the house before the insured event.

I guess if you had replacement cost coverage then it might get closer.

Even with car insurance, you don't get there. We're currently going through that with DS' totaled car... the insurance company is only offering the private party value of the car even though the dealer retail value (NADA, KBB, Black Book, etc) are about 12% higher.
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Old 11-24-2021, 09:50 AM   #9
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I think the only way that works is for you to collect the insurance claim and then sell the remains "as-is". Even then, you probably wouldn't end up with the value of the house before the insured event.

I guess if you had replacement cost coverage then it might get closer.
I think that you get the replacement cost value only if you actually do build a replacement. I've always found the replacement cost to be crazy-high compared to market value but I figure it doesn't really affect the premiums much because insurers rarely pay that much.
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Old 11-24-2021, 10:25 AM   #10
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I think the only way that works is for you to collect the insurance claim and then sell the remains "as-is". Even then, you probably wouldn't end up with the value of the house before the insured event.
I have a friend who did exactly this. Vacation home in Panama City, FL. House was damaged, but not as bad as most in the area. Got an insurance settlement, sold as is, and doubled his money in about 8 years of ownership. And, he was planning to sell anyway!

FWIW, this guy has the reputation for being the opposite of Scrabblers poor Snake-bit friend. He always seems to come out smelling like a rose.
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Old 11-24-2021, 11:45 AM   #11
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I see it as an incentive to NOT burn down a building to collect the insurance money. I wonder if insurance companies think this way
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Old 11-24-2021, 12:11 PM   #12
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I see it as an incentive to NOT burn down a building to collect the insurance money. I wonder if insurance companies think this way
Yes- the term is "moral hazard". You don't want someone to insure their property for so much that they'll be better off AFTER a total loss than before.
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Old 11-24-2021, 12:26 PM   #13
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We had flood damage - 2' of drywall throughout the house, floors, cabinets, trim.. Happened back at the end of July and there is finally progress being made. Not as fun as twenty years ago and doing it on a house that we didn't live in and that held our stuff. I've been aghast at the estimates the flood restoration company has submitted to the insurance company. Part of that is I'm used to dealing directly with subs I picked rather than having the extra layer of a restoration company adding their profit on top. We bought this house during the 2010 housing crash and the restoration cost is turning out to be about 10% less than our purchase price.

Some years back when talking to an insurance agent he pointed out that if we didn't have some crazy replacement cost, say $500k, but were insured for $400k and the building burned down, the insurance company would say that we had assumed 20% of the risk, and that if we didn't rebuild that our settlement would be 20% less than our insured amount, so $320k, even though we had insured for $400k. Seemed wacky, and maybe I'm misremembering, but there you go.
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Old 11-24-2021, 01:00 PM   #14
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Insurance agent here. The insurance carrier will require that you always insure your home for replacement cost. In the event of a claim they will pay the replacement value of damage, up to the limit of you policy, only if replaced. Assuming a total loss, you have the option of not replacing the home and accepting an actual cash value (ACV) settlement. This is defined as replacement cost less depreciation. The amount of depreciation is a very gray area and depends on condition, updates, etc. The client is usually never happy about the outcome. You could then sell the lot. The insurance company will never take title to the property.

For a partial losses, the insurance company would pay to clean up the debris, board up the remains and pay the ACV of the partial damage. You could sell the remains and lot as-is.

Regarding your desire to not have the hassle of rebuilding, think about the fact that you would be a home flipper the second time around. You would have none of the agonizing decisions of materials, colors, quality, etc. to suit your particular needs and taste. It would just be a market house. You could hire someone to do all of that for you and still come out way ahead financially.

Some carriers, such as Chubb and Cincinnati Insurance offer policies with guaranteed replacement cost, including a walk-away provision for total losses. The provision allows you to collect the replacement cost without rebuilding and you can sell the lot.

I'm surprised that your State Farm agent could not explain this to you. This is Insurance 101 stuff. If you have a high-end home that would take 2 years to rebuild, you need to consider an independent agent.
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Old 11-24-2021, 01:19 PM   #15
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Originally Posted by athena53 View Post
I think that you get the replacement cost value only if you actually do build a replacement. I've always found the replacement cost to be crazy-high compared to market value but I figure it doesn't really affect the premiums much because insurers rarely pay that much.
I agree with this in my experience. Yes, they will give you full assessment amount but will only write you a check but not for that full replacement cost at that time. If you replace the home, they will pay the full amount of replacement if the work is done. The initial check won't be for total cost until proven you are replacing and summit receipts. Thiis is how I seen IC work in my area.
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Old 11-24-2021, 02:38 PM   #16
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Some years back when talking to an insurance agent he pointed out that if we didn't have some crazy replacement cost, say $500k, but were insured for $400k and the building burned down, the insurance company would say that we had assumed 20% of the risk, and that if we didn't rebuild that our settlement would be 20% less than our insured amount, so $320k, even though we had insured for $400k. Seemed wacky, and maybe I'm misremembering, but there you go.
Yes- the term is "coinsurance". I remember doing an audit of a branch office in Watertown, NY in the 1970s where there were letters in the files from agents begging to let people insure their houses for half what they were worth because these were nice old folks with limited funds. Since total losses are rare (thank heaven) it would have meant they'd be paying half what everyone with similar houses paid but would be fully covered for the most likely losses- the occasional burglary or kitchen fire. Not fair to the other policyholders.
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