Fire Insurance Nightmare

[DaveG]

Your insurance agent should be able to be of some help. They should be familiar with building costs in your area, and such, and can help you determine the correct coverage. You can review your existing coverage with any competent agent anytime, to be sure your coverage level is adequate. In my area, for new construction, there is about a 4 to 1 ratio on land value to house. In other words, if a lot is selling for $100K, the target price is to build a house in there for a total cost of about $400K. Those are very approximate. If you are really worried, have an appraisal done to see what the current cost of completely rebuilding a similar structure on the same lot would run, and see if your policy would cover that. Dave

[Chia Pet]

Ok, thanks. I'll look into it.

[Chia Pet]

Which is why the replacement cost insurance is puzzling. It would be one thing if they just rebuilt. But if people can take the cash and run, then that's the problem of arson for profit arising.

[George E. Cawthon]

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.

[Mark]

Yes. Find a different insurance carrier.

[Jeff Cochran]

You worry too much. First, replacement cost isn't the price you paid. It's the price of replacing the house. Your land simply won't burn, no matter how far you are from a hydrant.

Second, replacement cost is a formula based on square footage and construction costs. You can easily find the average cost per square foot for the type of construction you have, and insure for that. If you're just estimating, try $150 per square foot and see how close you are to what a new house, less land, would be.

And last, call your agent. They're the only ones who can assess your specific needs and recommend the appropriate insurance. If you don't trust them, find another agent.

Oh, and go buy a fire extinguisher.

Jeff

[Tony Hwang]

[Chia Pet]

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.

[Stormin Mormonn]

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.

[Matty]

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

[andy asberry]

The confusion seems to be replacement VALUE (market value) and replacement COST (cost to rebuild). Some companies will not just write a check for the replacement cost. They require that you actually rebuild.

[Matty]

Exactly. If you choose not to rebuild, you will most likely receive Actual Cash Value: Cost to rebuild house today - depreciation = money you get less deductible. For example:

House built in 1953 burns down. Owner chooses not to rebuild. Cost of rebuild is $130,000(which is the amount the home was insured for) - 50 years of depreciation. Owner may expect roughly a little more than half for the dwelling. He can also expect to pay to have the home torn down and hauled away himself, plus paying all the fees, inspections, tests and whatnot to make sure the property is safe to rebuild on, etc. Items that the insurance company would have picked up had the owner wanted the home rebuilt - to a point.

This is just in rough-speaking terms, your insurance policy may vary...

My 2c,

Matty

[kevins_news]

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

[George E. Cawthon]

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.

[DaveG]

You can't use it to cash out. When 2 back to back tornados tore thru here about 6 years ago, about 95% or more of the houses in the city and surrounding areas were re-roofed, and a lot had siding damage, etc.... Most of us got say 75% of the estimated cost for the repair, and if that was what you wanted, you took the money and that was that. Claim done, keep the money, do whatever. If you wanted to actually fix your house, you used the

75% advance (or whatever the percentage the ins. co. paid, it varied by company) to get the contractor started. Then you got the final payment upon completion of the work, and presentation of the final bill the insurance pays the balance of the claim.

So if you want to replace, they pay the full cost. If you want to take the money and run, they depreciate. Dave

[Mary Shafer]

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

[Matty]

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

[Brian Elfert]

2x6 construction is required by code for all exterior walls in all new homes in Minnesota. More insulation can be used.

Brian