House Insurance - How Does It Work? (1 Viewer)

My wife and I have a nice $120,000 home and was wondering what a insurance company does if our home is completely destroyed by tornado or fire? What do most home insurance companies do? Do they just write a huge check or do they have the house restored exactly the way it was when it was first built? We love our house and it would be extremely upsetting if we could not get it restored as it was before any disaster should strike. Share your knowledge or experiences.

- Colton

Homeowner's insurance policies vary greatly in what is covered and what happens if you have a claim. The best way to get answers to your question is to call your insurance company and just ask them all your questions. Go over your policy with someone there at your insurance company. Diferent companies handle situations differently. Make sure that you understand it. It can be the difference between being covered for a loss and not being covered for something that you thought was covered.

Just my advice.

Please note my location.

In my experience homeowners insurance cashs your premium payments with glee then, about four weeks after your house is destroyed they send out an adjuster whos job is apparently to jerk you around.

After six months or so if you haven't given in and accepted their offer of pennies on the dollar what it will take to restore your home, you will complain to your congressman who will have an important official from the state call them.

A week later a lawyer from the company will call and ask how much money you want and beg you to get the state off their back.

Lesson? Before signing with an insurer look not only at their ability to pay claims, but their willingness.

Oh, the mechanincs;

The adjuster inspects your home for total restoration. If it is over 50% it may be demo'd then rebuilt. Insurance may not cover the cost of any new codes.

Once the adjuster determines the cost of restoration (aka lowballs you) they cut a check for that amount less a deductible. The deductible may be as much as 2% of the insurance limit. (not the loss, the high limit) depending on the nature of the loss.

This is the part where fighting begins.

The check is paid to you and to your mortgager if you have one. If the damage is severe they will keep 50% in escrow until half the repairs are done. (remember the lowball offer?)

Meanwhile you get about half the value of your contents and then a reimbursement when they are replaced. If you are lucky you get reimbursed monthly for rent paid.

It is up to you to find a contractor and arrange for the restoration. If the disaster affects a large area good luck finding a contractor who can start promptly or for what the insurance wants to pay.

That's about all there is to it.

First, you have to insure it to value. $120K is probably the price including the land....land doesn't usually move or burn (unless there's an earthquake) You'll need to know how much per square foot it would cost to rebuild you house at todays prices of labor and materials. You should be able to purchase a policy with a replacement cost rider that usually will provide for the insured value plus an additional percentage above (110-125%).

If you've got amenities above those of a standard house (ie exotic flooring, paneling, etc) those costs need to be calculated into your insured value. Under-insuring your house is a mistake. Example: if you only insure it to 80% of its replacement value and there is a total loss, the company will probably only pay you 80% of the insured amount. It's up to you, not the company or its agents, to come up with the proper amount and to keep it current as things change (adding a room, pool, whatever) and/or increase in cost.

Mort

Another point to mention is that you should do a home inventory. I keep mine stored in my Yahoo Mail account (among other places) so I could get to it in case of a disaster. The more detailed the better (although this is time consuming). But, especially for expensive items (ie HT gear) you should try to put down serial numbers and/or invoice numbers along with the location of purchase. Pictures or videos of your belongings also help.

I know this isn't really what you were asking about, but it's stuff you should certainly consider in this process. Also, as I mentioned above, don't keep this inventory in your house. If your house gets destroyed it won't do you much good. Either keep a digital copy on a server somewhere or put it in a safe deposit box somewhere.

not worth a damn in my opinion

FYI, home owner's insurance only covers household items, so if your house burns down and your car is in the garage, tough luck. I'm sure things like riding lawnmowers could be excluded too, cheap sob's

I've never had a claim but here's what I'm in the process of doing for household inventory:
Take pictures of everything with a digital camera and burn the images to a CD.
Inventory all your DVDs, CDs and other media using something like dvd profiler or whatever else you can find. Export the data to a file and burn to the CD. I've been told that the insurance company will actually replace the media title by title instead of just giving you x dollar per piece of lost media.
Take the CDs to the safe deposit box. Don't have one ? Get one ! I have a small safe deposit box that only costs $40 per year. Keep ALL valuable paperwork like house deeds, car titles, and inventory CDs there.

If you don't want to pay for a safe deposit box just to keep the CDs containing your house's contents, just store them at your parents' house, work, or somewhere similar offsite (or both).

What year was your house built in?

I agree with others warning against being underinsured. A house that sells for $120,000.00 may cost over $150,000.00 to replace. Also if your home is destroyed by a tornado or fire then you have to pay someone to remove the wreckage or include it in the contract to rebuild your home. If you have a concrete slab foundation, it’s not cheap to break it up, haul it off & properly dispose of it along with the rest of the wreckage.

Living in tornado alley we hear the news reports after the storm of people who have their homes destroyed and their insurance won’t pay for half of what it takes to remove the debris and rebuild.

re: underinsured - even if it is NOT a total loss, you may get only a part of what is due.

ex - your home is worth 200,000, bt you have only 150,000 covered. (75%) You sustain damage of $50,000. You get 75% of $50,000= $37,500 less deductible.

Many homeowner's policy protect against fire and theft, but not "acts of God" like hurricanes, tornadoes and earthquakes. You often need special additonal riders (and extra premiums) or even entirely separate policies to cover these things. The same applies to flood insurance. You need to sit down and read your policy (including that annoying fine print) to find out what is covered, under what circumstances and subject to what conditions*, and most importantly what is excluded.

(*Fire policies will obviously prevent you from collecting for a fire that you youself deliberately set, and may also deny payment for fires caused by negligence. Theft policies may not pay off if you fail to take the most elementary precautions to secure your policy. If you live in an area where crime is not uncommon, have a house-full of expensive electronics, big picture windows, no blinds or drapes and habitually leave your front door ajar, you might have trouble collecting if you get cleaned out. )

Regards,

Joe

I was a property insurance adjuster for 4 months for one of the biggest insurance companies in the US, and I actually did that...., in this case, on out-of-print Disney videotapes. However, this practice depends on the individual adjuster. To me, the idea was to come up with an amount it takes to replace the item in question. If it took $45.00 to replace a video of "Snow White", so be it. On the other hand, the $500.00 VCR you purchased 15 years ago will probably have a $100.00 replacement value.

I advise everyone to read your home owner's policy. They are quite clear on what's covered and what's not, or the limitations to the coverage (of jewelry, cash, tools, etc...). If you have items you use for your profession/business, home owner's policies generally has a limitation on coverage for "business items". I had to declined a claim for $12,000 worth of Nikon camera gear because the insured used the camera/lens for business usage. Oh, and he had all his receipts and boxes too. His answering machine answering with "You have reached blah blah blah photography..." doesn't help neither. On the other hand, you may be surprised that things you didn't expected to be covered are actually covered.

Regarding DVDs, CD, vinyl records, etc... check your policy for coverage. Once something becomes a "collection", you may need an extra rider for the "collection".

Fascinating - it's the reverse in the UK. Land is very expensive here, and generally the replacement value of your house is way less than the purchase cost. E.g. our town house with a minute garden has a rebuild value of 60% of the total cost.

Back on thread. In addition to the wise advice given above, I would recommend getting a fire safe for all the valuable documents you don't keep in a safety deposit box. Oh yes - and read the small print in your policy.

I think a lot of it has to do with the age of the home. A brand new $120K home of which $10K is for the lot may only cost $120K to remove the destroyed home & rebuild. But if the home is older, due to rising costs of construction what was a $120K home 10 years ago may cost over $150K to build today.

It’s even worse for older homes. Many tornado victims have not annually adjusted their insurance coverage for inflation. So when the tornado wipes out their 20 to 30 year old $60K home they discover that to rebuild the same sized home it may cost $120K! So if they haven’t adjusted their insurance coverage for inflation, even if their home was completely paid off, they now have to start over with a new mortgage.

What we need to realize is that our mortgage company requires us to have enough insurance to pay off the mortgage, not to rebuild the same sized house. We need to take it upon ourselves to not be underinsured which is not very hard considering that most insurance companies harass the hell out of you to increase your coverage. If the insurance premium is more than you can afford, then increase the deductible rather than be underinsured.

Jay, that makes a lot more sense. Thanks for the explanation; I couldn't believe that land is that cheap in the USA.

There are many places it is not.

In my area land can go from $5000 for a small lot to $500,000 to one on water to $1mil for prime water.

Location. Location. Location. So true.

Hurricanes and earthquakes, yes. I don't think I've ever seen a policy that excluded tornadoes -- they're small enough that they usually only damage a handful of houses and so coverage isn't a problem. Insurance companies don't want to cover perils like earthquakes, since they can be so large they could drive the entire company under.