Insurance coverage often more than home is worth
Q: Every year, I get a renewal notice from my homeowners insurance company and it indicates the value of my home is over $700,000. I understand that this is what they think it would cost to reconstruct the dwelling, even though I could subcontract it for 25 percent less.
And if the structure were to burn down to the ground, the removal cost of damage isn’t going to cost $200,000. Why can’t I specify an amount (e.g., $500,000) of coverage? If the cost to reconstruct comes out higher, it would be on me (the homeowner) to pony up any difference.
Incidentally, the estimated selling price of the home, including pool, 5 acres and outbuildings, is around $500,000.
A: The short answer to your question is that you can tell your homeowners insurance company to insure your home for a specific value amount. If you want the company to simply insure you up to $500,000, they can and will sell you that policy. The policy you currently have may include a “replacement value” clause. This clause obligates the insurance company to pay out money to rebuild the home.
Insurance companies need to make sure that their policy holders are paying the right premium for the coverage. If you told the insurance company that you wanted an insurance policy for only $500,000 and the home suffers a catastrophic loss, the insurance company might still be on the hook to rebuild the home and pay out $700,000 to rebuild it if it includes a replacement value clause.
We have some friends who had a $1,000,000 policy on their home with a policy that gave them guaranteed replacement coverage. When the home burned to the ground, the insurance company paid out $2,000,000 to rebuild the home to the size and quality it was originally.
To avoid this issue, insurance companies will require homeowners to raise their coverage to what the insurance company believes it will cost to rebuild the home.
You might be right that you can rebuild your home for far less than what the insurance company believes it will cost, but their models don’t anticipate each homeowner being able to undertake the rebuilding of the home. The insurance company expects that you will hire contractors, architects and other professionals. As those costs get included in the coverage amount, we see how easy it could be to say that your home’s coverage could be upward of $700,000.
If you want a policy with less coverage, the insurance company can sell you a policy that will cover you up to $500,000 and not one cent more. You’d take the risk that if the costs come in above that amount, you’d have to come up with the money to rebuild the home.
As a side issue, your mortgage lender — if you have a mortgage lender on your home — will require you to carry a homeowners insurance policy of no less than the face amount of the loan you owe to the bank. If you owe $550,000 to the bank, the lender will want to know that you have at least $550,000 of insurance coverage on the home.
If you want to have coverage that will give you enough money to rebuild what you currently have, you’ll need to follow the insurance company’s requirements. That isn’t to say that you can’t shop around for coverage. You may find that the insurance company you’ve had for some time has raised your rates year after year and that their rates are now far higher than what you’d get with a new company. Shop around for insurance coverage every year or every other year to make sure that the insurance premiums are in line with the market.
Ilyce Glink is the CEO of Best Money Moves and Samuel J. Tamkin is a real estate attorney. Contact them through the website ThinkGlink.com.