Homeowner’s insurance replacement cost and sufficiency
Taking a shot here that an in-the-know person will be able to advise. I am trying to revise our homeowner’s insurance policy, which has skyrocketed recently, like everyone’s. It got me thinking about rebuild values. In the event of a total loss, I would not want to rebuild as is, and would likely reduce square footage by at least half. This is in the effort of building back to the level of sufficiency for our family.
I am not sure this is allowable regularly or in our specific case. I have been reading that mortgage lenders often require replacement value coverage for homeowner’s insurance. In my mind, it would seem to make sense that the minimum required homeowner’s insurance is the outstanding amount of the mortgage, but there may be other variables involved here that I don’t understand yet.
While tangential, I think this is germaine to this forum. If 80 million single-family houses in the US are all insured to replacement value, with no way to insure for a smaller rebuild, we are guaranteeing that turnover in these homes will see them build back as big as they ever were, and lose opportunities for rebuilding aimed at sufficiency.
Anyone know whether purposefully and dramatically lowering the replacement number on the insurance is possible?
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Replies
If the insurance encouraged one to rebuild anything different than the existing some would be embolden to burn the house that they no longer desired and use the insurance payment to build what they want now.
Walta
Insurance fraud and arson are very serious crimes, and I doubt the insurance policies are what are keeping people in check. If your house burns down, they investigate.
Now if someone was actually thinking of doing this, it would probably be going the other way, burn your old, crummy house down and get a perhaps bigger, but certainly better house. Burning your big house down to build a smaller one? Not many people are going to do that.
I don't think the insurance policy is even a deterrent. I'm pretty sure if your house is a total loss, they are not going to force you to build the exact house that was there.
In practical terms, the bank has a lien on the property so the insurance company will make the check out to you and your bank jointly, meaning if you rebuild, the money goes to the lender and then they decide how/when to disburse it to ensure that their interests are protected.
The mortgage holder may negotiate with you or they may not. Check the mortgage documents as some have language that requires you to maintain the condition of the existing improvements (house, etc), or prevents you from reducing the value of the property used as collateral (land value is not considered).
If you really want to, contact the bank and ask what the minimum coverage is for your property, and then buy that.
I have the opposite issue - I don't think the standard policy would actually fully cover the rebuild cost for my house. Construction costs are rising quickly and the most likely scenario for a full loss is a regional natural disaster that would further increase construction costs. So I have in the past asked for a higher coverage.
Homeowner's insurance policies typically require coverage for the replacement cost, which is the amount it would take to rebuild your home exactly as it is today, not a smaller version.
Update: I talked with my mortgage lender, who says they require coverage for either the unpaid principle OR 100% replacement cost. Now working to get new quotes from my homeowner's insurance.