After you've lost everything in a disaster, home insurance helps
you pick up the pieces and rebuild.
But what if you'd rather buy another house somewhere else?
You file a
claim, sell the lot, buy another place and move on with your life.
That might sound easier than the painstaking process of rebuilding
your house from the ground up, but it comes with its own set of
"You have to prove what you're entitled to," says Greg Raab, a
National Association of Public Insurance Adjusters board member and
manager of integrated services at Adjusters International in Utica,
N.Y. "You have to dot your i's and cross your t's. It's not as
simple as showing your receipts."
Whether you can use the full replacement cost -- the amount it
would take to rebuild your home -- to buy a comparable house is not
a surefire option, except in California, where a state law
expressly gives consumers with replacement cost policies that
right, says Amy Bach, executive director of United Policyholders, a
consumer advocacy group. But even so, confusion and disagreements
arise even in California.
"The big hole people seem to fall into is they can't reach
agreement with the insurance company on that theoretical value [to
rebuild]," she says.
Here are some of the questions that will arise if you're
thinking about buying instead of rebuilding.
Do you own the home free and clear?
Any settlement will be made to you and the mortgage lienholder
if you still owe money on your home. If the settlement is large
enough to pay off the mortgage, then that portion goes to the
lender and you keep the remainder for a down payment on another
"If the settlement is not enough to pay off the mortgage, then
buying another property is probably off the table," Raab says.
What does your insurance policy say?
Most home insurance policies provide replacement cost coverage
for the dwelling. In fact, a mortgage lender typically will require
the homeowner to have replacement cost coverage, says Ronald Reitz,
president of the National Association of Public Insurance Adjusters
and president of San Diego-based Quality Claims Management
But there are some policies that provide coverage for actual
cash value of the home (not including the lot). This might be the
case for an older, run-down home, where the cost to rebuild would
far exceed the value of the home, putting replacement cost coverage
out of reach. In California, actual cash value for a dwelling is
the same as
fair market value
, unless it's defined otherwise in the policy, Reitz says.
But in states other than California, even replacement cost
policies can include limitations on the settlement if you decide to
buy another home instead of rebuild.
"Know exactly how your policy treats a total loss. When push
comes to shove, the language in the policy is what matters," Raab
says. "It's a contract."
How much would it cost to rebuild?
After a disaster, the insurance company doesn't just write you a
check for the amount of your dwelling coverage and send you on your
way. If you have a replacement cost policy, you and the insurance
company reach an agreement on how much it will cost to rebuild, and
then the insurance company will release the money in portions.
Typically the insurer will provide the actual cash value and then
release the remainder once you've actually replaced the home,
whether you rebuild or buy, Reitz says.
Even if you plan to buy, you and the insurance company must
settle on a figure for how much it will cost to rebuild to get the
full replacement cost amount. United Policyholders recommends you
get independent estimates on the scope of the loss and the cost of
rebuilding to replace the house. Then use that information to
negotiate with the insurer for how much money you can use to buy a
"You have to present compelling evidence of what it would cost,"
Bach says. In California, "he who negotiates well can generally buy
instead of rebuild if you have a replacement cost policy."
That means you'll need to hire some help, such as a
public insurance adjuster
. Contractors aren't going to want to put the time into estimates
for a theoretical job they'll never get.
Essentially you have to recreate on paper the house to figure
out what you're entitled to, Reitz says. "That's quite a process to
figure out. . . . It's hard for people to navigate on their
Why not just accept what the insurance company offers?
Many insurance company adjusters do a good job, but the home
insurance company has an incentive to keep costs down, Reitz says.
Insurance companies want to interpret coverage as narrowly as
possible, while homeowners want a broad interpretation.
Once you agree on a settlement, the insurance company won't
release the full amount of the replacement cost until you've
actually bought a replacement home. Then the insurer will want to
make sure the money is spent toward a comparable replacement.
Insurance is supposed to put you back to where you were -- not make
you better off. You're free to buy a bigger and better home than
you had, but you'll have to foot the bill for any amenities in a
new home that you didn't have in your old house.
As you go through the process, don't rush any decisions. Both
Raab and Reitz have seen clients' marriages crater under the stress
of losing everything in a disaster.
"Don't underestimate the stress you and your family may be going
through," Raab says. "Ask for help from your agent or trusted
adviser. Don't make decisions under duress."