Fire Insurance Nightmare

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Maybe a doctor could help!
Shepherd
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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.
--
Ron Hardin
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Ron Hardin wrote:

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 the pen.
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 policy holders.
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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 footage.
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 insurance business.
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.
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Chia Pet wrote:

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.
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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
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wrote:

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'.
My 2c,
Matty
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2x6 construction is required by code for all exterior walls in all new homes in Minnesota. More insulation can be used.
Brian
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Chia Pet wrote:

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.
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Chia Pet wrote:

Yes, pay for an appraisal, which includes a price for rebuilding. Send this to the insurance company and have them increase the insured value of the house.
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wrote:

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.
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Have you talked to your insurance agent? There is a "full replacement" coverage that may be suited to your needs.
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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 insurance coverage/appraisal has gone up,were insured for "replacement" value which now is up over $130k plus an additional $18k for an "outbuilding" we have yet to locate! Between the house, loss of use and contents, if we had a fire we would be looking at a check for over $275k!
I would talk to your insurance agent asap..

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--
Mark

The truth as I perceive it to be.
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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 order.
--
Christopher a. Young
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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 home.
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 appraiser.
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!
Matty
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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 different things.
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.
Kevin
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