You don't have to replace the real estate; so that part of the cost
doesn't need additional insurance.
If your house itself actually has risen in replacement cost, insurance
companies are happy to insure it for more; the more they insure, the
happier they are.
They just don't want to insure it for more than it's worth, because
it encounters a moral hazard, namely people making money by setting
fire to their house; which raises the odds against them enough for them
to notice on the bottom line. They want to be sure you can sell it
for more than you're insuring it for, so you sell rather than burning.
That argument is a non-starter. First they won't give you
more money that it will cost to replace the house, no matter
what you insured it for. Second, they would be very happy
if you burned it down yourself and you will most likely be
caught and they won't have to pay anything. Third, burning
for profit is rather risky and likely to lead you right to
Finally, although insuring a house or building for more than
it is worth won't end up with a profit if it burns, you can
insure a persons life for any amount you want, but you don't
see people dying by the droves as others kill them off to
get the life insurance. Maybe it's because it is MURDER.
And, the insurance company doesn't give a damn about moral
hazards, they just care about profits so that's why they
don't pay anything that results from illegal activities of
But there's a huge rub. Replacing my house, according to the insurance
company, would cost about $350k on a home with a market value of $50-125k
(depending how you count it). That's because of building costs and square
So, then the problem. They fight the claim. Theoretically, I could rebuild
and then claim the money in court and win if I had a replacement policy (if
there is no weasel clause). But, if I don't have the money to build first (I
don't), then they offer some lowball comparable price for a neighborhood
purchase and threaten to withold everything and initiate an arson
investigation. I tell them I just want my house rebuilt and they yell FRAUD!
Why should I get a brand-new home to replace the old ragged one? I can take
their paltry settlement or hire a lawyer and litigate it for years.
Suddenly, the policy isn't really insurance. It's a contract to get a ton of
crap if I ever need to collect on it. That's the reality of much of the
If I really could get what I bargained for, I'd buy in a second. I'd say
here's the several hundred more, give me the gold plated coverage.
And that's why they don't pay without a fight too. And the more ammunition
they have, the less chance the court will find bad faith if they fight, and
the more likely it will be in litigation instead of in the form of a check
at crunch time.
I haven't a clue what you are talking about. Replacement is
replacement, There is no way you can buy/sell a home for
$125k and need $350k to replace it. Maybe what you are
trying to replace is an old piece of crap with a modern full
frills house. For instance if you house is a 3 bedroom 1
bath, you sure won't get the money to replace it with a 5
bedroom 3 bath house. Only in a very few highly specialized
cases would the difference in cost and replacement be a
factor of 3, and in those case your house would probably be
condemended as unlivable.
They don't "pay without a fight" unless they have some proof
of illegal action. Otherwise, they are likely to end up
paying 3-4 times as much in fines and other court costs.
On Thu, 13 Nov 2003 00:25:40 GMT, "George E. Cawthon"
Having to build the replacement house to (current) code can mean
adding what seem like features. More insulation is an example
locally. Since they can't build a drafty, under-insulated house like
my current one, I would get a better house, with a higher resale
value, than I have.
I am quite willing to agree that meeting the minimum requirements of
code doesn't really qualify as a "frill", though. And it certainly
wouldn't cost three times as much, particularly when the purchase
price includes the land, which wasn't replaced.
Mary Shafer Retired aerospace research engineer
I've had cases where people have purchased homes around our city for
$50-$60,000(mostly because of the neighborhood) and it'd cost upwards of
$200,000 to replace them. Homes from the turn of the century would cost more
to rebuild than a standard home today. Homes then used 2x6's instead of
2x4's, some homes have oak flooring & moldings, on top of having to update
the home to current code standards. Replacement Cost means Replacement Cost.
I've had clients complain about the price of insurance, but when they have a
claim they expect to get their premiums back(figuratively speaking) and then
some. So yes, you can conceivably purchase a home for $125,000 and have the
Replacement Cost equal $350,000.
As far as 'frills', if the home burns down and you had an old 'octopus'
furnace - would you expect the insurance company to find another old furnace
to replace it? Of course not. Granted you will see some 'upgrades' - new
furnace, water heater, etc. but I don't consider these 'frills'.
Sure, just get a replacement policy. It's the insurance
company's problem of figuring out what the value is and
setting the price of insurance. If the house burns down,
they still have to replace it even if they valued the
replacement cost too low.
But, you bought a house and a year later it is worth twice
what you paid for it and you are whining? I'd be dancing
if I could do that. It took at least 10 years for my house
to double in value.
Have your local fire department inspect your house. They will do
this for free and provide good suggestions. Installing a sprinkler
system is better than having fire insurance, plus it could save your
life. Test your smoke detectors (and replace them if they are old)
and have a fire extinguisher in the garage, kitchen, and basement.
We have had the opposite experience, we bought our home for $66k four years
ago and did some repairs/improvements (small stuff) and each year our
coverage/appraisal has gone up,were insured for "replacement" value which
is up over $130k plus an additional $18k for an "outbuilding" we have yet to
Between the house, loss of use and contents, if we had a fire we would be
at a check for over $275k!
I would talk to your insurance agent asap..
Close your eyes (after reading this, silly) tap your heels together three
times, and say "I want to be back in Kansas, Toto".
And then call the city appraiser, and the insurance agent, in about that
Where I work and live(I'm an insurance agent in the midwest), when we write
insurance on homes, a Replacement Cost Estimate is done. I ask about all the
features of the home and based on that with the age and where its located, I
am able to come up with an approximate cost of construction to rebuild the
house today. That's how much insurance I recommend clients place on their
Many times the RCE is less than the mortgage amount, so clients are forced
to insure for the mortgage amount(which is kind of stupid, IMHO).
Ask your agent to do an RCE or have the insurance company send out an
Do remember that RCE does not equal Market Value(what you could sell the
home for). Market Value includes land, RCE does not... For example, my
home's Market Value is around $120,000(we recently refinanced so I know) but
the RCE is around $130,000. Some homes on the lake are going for $750,000 -
but the RCE may only be $350,000.
Hope this helps!
So has the original poster understood what's going on? Seems simple
enough for me.
Unless the contractors in your area are all banding together in some
insane and probably illegal fashion, the cost to replace your *house*
is exactly the same as it was last year... not accounting for minor
inflation costs. Land value and the purchase price are two totally
The rising real estate prices you have seen have not been because the
cost of houses have gone up, it's because the cost of the land has
gone up. Insuance for a residential dwelling does not take the land
cost into account at all. It's all only for the physical house and
furnishings. The only bad thing about rising prices is going to be
in your taxes. if land prices have gone up then you're going to
start paying more tax.
So the cost to rebuild the house only depends on the cost of materials
and the cost of labour. Your *land* value may have dropped 50% or
risen 400% but it will still cost roughly the same to rebuild your
house on that piece of land. Building costs don't fluctuate like
purchases prices. And the 'Purchase Price' of a home also might be
totally unrelated to value. It all depends on how much people are
willing to pay.
So you are fine. I would find out how your insurance company
determines your house value though. Where i live the insurance
companies get a proper appraisal done on the house and use that to
estimate the rebuild cost. As people have said, they usually allow
rebuilding up to 125% of that to account for inflation. If your
insurance company let you choose an arbitrary value then i would worry
that they have some sort of strange policy.
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