If your home is destroyed by a fire, your insurance company will determine the cost of rebuilding your home. Payment will depend on a number of factors such as the type of policy and amount of coverage you carry. In most cases, however, you will not receive the entire amount to rebuild up front.
Replacement Cost Coverage
The most common type of policy loss settlement is based on the cost to repair or replace your damaged property. With this type of loss settlement, if your home is completely destroyed by an event covered under your policy (such as a fire or explosion), your insurance company will estimate the amount needed to rebuild and will pay that amount – but only up to the amount of insurance carried. This means that if your home is underinsured, you could face significant out-of-pocket expenses because the coverage will not be sufficient to rebuild what you had. If you are overinsured (meaning you purchased more insurance than needed), you will still only get the amount estimated to rebuild the home based on what you had. The replacement cost is not the same as the market value of your home. What you could sell your home for and what it would cost to rebuild it can vary significantly.
Advance Payments for Rebuilding
Many insurance companies pay for large losses by providing advance payments for work throughout the rebuilding process. Although you might not receive the entire payment up front, you won't have to pay for repairs out of pocket and then wait for your insurance company to reimburse you. However, there are two important points to remember. First, many policies are written on a replacement-cost basis. These policies determine the cost to rebuild based on the home you had -- so if you decide not to rebuild, you might not be entitled to the full amount. And second, if you have a mortgage on your home, loss settlement payments will be made payable to you and to your mortgage lender, as well as to anyone else named in the policy and having an ownership stake in the property.
Upgrades Not Included
According to Laurie Pegler, a coverage attorney with the Property Loss Research Bureau, many insurance companies have a list of recommended contractors, but you have the right to use the contractors and craftsmen of your choice. You also have the right to schedule work at your convenience and to modify rebuilding plans. Pegler notes that, “many people choose to add upgrades or improvements when rebuilding their homes. However, if you plan on rebuilding with upgrades, the additional costs will not be covered by your insurance policy.”
Valued Policy Laws
But what if you don’t want to rebuild the home? The answer might depend upon where you live. Most states permit insurance companies to pay only the actual cash value of the home until the repairs are complete. Actual cash value is the cost to replace the home minus depreciation. If you don't rebuild, you can expect to be paid the depreciated value of the home. However, if you live in a state with a valued policy law, you might be entitled to receive the full amount of your coverage following a fire loss without proof that the home was actually repaired or rebuilt. States with valued policy laws include: Arkansas, Florida, Georgia, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, West Virginia, and Wisconsin. In some of these states, valued policy laws cover losses for perils other than just fire, but all cover fire losses. Regardless of where you live, it’s a good idea to read your policy and know the loss settlement terms before a loss occurs.
- Laurie Pegler, CPCU, Property Loss Research Bureau, Downers Grove, IL
Lynn Knauf has been involved in the insurance industry for more than 25 years working in a variety of positions including underwriting, claims and government affairs. She has written on insurance and political issues since 2010. Knauf holds a Chartered Property Casualty Underwriter designation.