I'm buying my first house and getting quotes from different homeowner insurance companies. I noticed a lot of them are only quoting me for about 90% of what I'm paying for the house. When I asked one of the agents about this, they explained the dwelling coverages are for how much it would cost to rebuild the house. So, in the case of the house burning down, they would pay for having the house rebuilt. Is this how homeowners insurance usually is?
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4The best way to answer this, especially in light of the comment you made on @mattm's answer about receiving quotes that were structured differently, may be to talk with your insurance agency to understand the practical differences in coverage. It will be hard for us to know why the quotes were different without also knowing what specifically the policies were for.– dwizumCommented May 2, 2019 at 13:37
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3In addition to the cost of land issue (you can rebuild on the lot where your home burned down without having to buy a new lot), there's the question of whether it might be cheaper to just buy another comparable home in your area (and sell your current lot) then it would be to rebuild. If builders aren't building homes in your area the answer to that question is probably yes.– Brian BorchersCommented May 2, 2019 at 13:39
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There can be another calculation into a minimum: several years ago I had a HELOC mortgage company insist that my minimum total homeowners insurance be equal to the total of the remaining principal on the primary mortgage plus the entire draw limit of the HELOC, which put me a few grand over the estimated rebuild cost.– user662852Commented May 2, 2019 at 14:23
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8 Answers
Homeowners insurance only needs to cover the cost of rebuilding a home, it does not need to cover the cost of land. In some areas, the cost of the land can be more than the cost of rebuilding a home.
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12On the other hand, it could be that the cost of new construction is higher than the cost of buying a comparable home on the local market (and selling off your old lot) because home prices have gone down in your area. Commented May 2, 2019 at 13:42
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10Also the personal property inside the home, make sure your insurance adequately covers your stuff. Many policies have limits at a category or even item level, ie $2,500 for jewelry in total, or $1,500 per piece of jewelry. There may be items that you want scheduled personal property coverage on due to the limits of your homeowners policy.– Hart COCommented May 2, 2019 at 14:48
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9Nit: The insurance needs to cover the cost of clearing the site (and disposing of the waste) as well as building the replacement building. You could well argue that is covered under "rebuilding" - but I think it is worth pointing out explicitly. Commented May 2, 2019 at 16:27
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4@HartCO in the UK at least, buildings insurance and contents insurance are two separate issues, even if you choose to take both types of insurance from the same company. There is no necessity to use the same company for both - for example if the contents include individual high-value items you may get a better insurance deal for those items from a specialist insurer. Commented May 2, 2019 at 18:15
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6It also needs to cover the cost of living somewhere else while your home is being rebuilt.– MohairCommented May 2, 2019 at 18:57
You need to consider the point of insurance: it's to protect you (or if the property is financed, the lender) against catastrophic losses. So in the case of homeowner's insurance, you have to consider what would be a catastrophic loss to you. If you could easily afford to rebuild after a fire, then you don't actually need insurance. If you aren't that wealthy, your insurance probably needs to cover not only the cost to repair or rebuild the house, but the contents & living expenses while it's being repaired.
Another factor comes into play if, like most of us, you have a mortgage. The lender will probably require you to carry insurance for at least the outstanding balance of your loan, to insure that THEY are covered for loss. This means that you might have to insure for more than the replacement cost of the structure, if your house sits on a valuable piece of land.
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Presumably the mortgage lien covers both the building and the land, so in case of a fire the lender still has some collateral. But this is typically something where you'd follow the demands of the lender. If they want an insured value of 187000, then you ask the insurer for a quote for 187000. There's just not enough to win here by trying to negotiate.– MSaltersCommented May 3, 2019 at 12:30
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@MSalters: In theory, yes. In practice they - or at any rate, the lenders I've dealt with - just don't work that way. Lots simpler to just look up the amount of the loan, and insist on that much insurance coverage. Indeed, I suspect it's all done by computers these days...– jamesqfCommented May 3, 2019 at 17:37
Homeowners insurance only needs to cover the cost of rebuilding a home and cover the cost of clearing the lot ( in case of total collapse/fire).
If builders aren't building homes in your area, then it will be costly to build the home, then you may just want to take the Insurance proceed and to buy another home ( that may be suitable more to current circumstances) and sell your current lot.
When I bought home, some insurance companies were trying to sell insurance with limits as 120% of the home plus lot values certainly for higher premium, when I talked further they reluctantly agree to lower limit and lower premium.
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How do you define "in your area" ? In the UK, I've had major building work done by a company based 50 miles away, simply because they were quoting the best price (and that price included their daily 100-mile-round trip commutes.) Commented May 2, 2019 at 18:20
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@alephzero Does it matter much? Neil is just suggesting if rebuilding the house is more expensive than giving up, you could just do that instead. Commented May 2, 2019 at 19:38
Yes and No. There's a lot more than merely replacing the physical house.
Rebuilding all the structures to current building code, whatever that code is at the date of the rebuild. If the local authority changes the local law to require something like (hypothetical) an isolated independent fused power circuit to each room, then that will cost more.
1b. Consider driveways, fences, utilities feeds in from the property boundary, and landscaping costs. Even plants in the garden have a replacement cost and they generally don't survive being near a fire.
Demolition and Disposal of the old structure. More-again if there's something nasty like Asbestos. Expect this to cost tens-of-thousands.
Remediation of Land - this may not apply but if the cause of the claim has damaged the land then it may require remediation work to be reusable. Think of a landslide or sinkhole or anything that makes the ground move or change.
Timing - you will need somewhere to live. Many insurers offer some kind of "temporary accommodation" benefit, so in the event of a supported claim they will cover a week of a motel room, and then the rent on a property for up to ~6 months. Details vary so read the fine print. If this isn't offered, you will be out of pocket for this.
Public Liability - not sure what your area calls it. Check your insurance fine print for what happens to other people's property as a consequence of your event. IE, if your home caught fire, and then set alight the neighbour's house. Read the details and know what you're getting into.
Insurers don't make it easy to compare, and they won't be forthcoming on details of exclusions.
On the other side, insurers love the word "depreciation". My home contents was insured but they only offered 45% of the replacement cost because things were more than 12 months old. Phrases like "Guaranteed new for old" only apply to a limited range of items, like baby clothes and bedding. Read the fine print.
Our 50+ year old driveway payout was depreciated by 95%, so offer was less than the $500 excess I'd have to pay on that claim so was not even worth claiming. And the driveway was in perfectly usable shape before being damaged despite its age.
Contents insurance is another issue, and where the boundary between home and contents falls.
It's advisable to insure content with the same provider as your home insurance, because then there's less financial advantage for them to play games about items like carpet and curtains.
Finally - insurance is always a two-part gamble. Some people go all their lives paying premiums and then never make a claim. If events occur, then the second part of the gamble is whether the insurance you bought applies to the events.
Its a perfectly reasonable strategy to save and invest your "premium" so that you have some level of savings. But understanding that you'll only have the balance. Advantage here is that you will have that balance, and in your old age that capital is available.
(If you're mortgaged, then you may be required to have full replacement insurance by your bank or financier.)
Source: I've been through 7 years of hell with Insurers after the earthquakes in Christchurch, New Zealand. We were also cursed with a government-mandated specialist risk insurer called EQC, who combined the traits of insurers and government departments.
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This is exactly how homeowners insurance usually works. They give coverage at about 90%, because you wouldn't lose the land in the worst case event. In other words, if you lost your home in a fire, you would only have to rebuild it and not your land.
Homeowners insurance is one area a lot of people can save money. Less than .317% of homes experienced a fire in 2010, with an average repair of about $18,000 (reference). Furthermore, only about .03% of fires result in complete loss. These statistics are from 2010 and homes are built even better today, with better safety regulations and laws designed to keep your home safe. So, they've likely lowered.
It's always wise to be safe, but notice areas you can save money in the process.
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16You wouldn't lose title to the land, but you would lose the use of it (because it's occupied by a burnt-out husk). So insurance needs to cover the cost of clearing the lot + new construction, not only new construction. More worrisome is that you suggest that you can save money here. The low probability of fire, and low probability of total loss, and reasonable cost of repair after the average limited fire, are already built into the price of insurance. The age of your home and adherence to new electrical and fire codes -- already built into the price of insurance. Commented May 2, 2019 at 14:18
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1@BenVoigt Of course! Very valid point. I'm glad you added this. I simply suggested this as an area that people can save money because I often see people overpaying for insurance! I have no intentions to get the OP under-insured, just to get mattm looking at what's really needed.– Corey PCommented May 2, 2019 at 14:26
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2How do you define "overpaying" though? The facts you're listing in your second paragraph are (as per Ben's comment) already accounted for in the underwriting of the policy. What would you suggest people change or do differently to save money, while ensuring you're not under-insured?– dwizumCommented May 2, 2019 at 15:45
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10Concrete suggestions about what could be saved would be better than vague assurances that "you can save money".– chepnerCommented May 2, 2019 at 15:53
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1Note that there are situations where you lose the land in a worst-case event. For example, your house is on a cliff and it collapses into the ocean. However, these cases, like floods, are generally excluded from standard homeowner's. Commented May 2, 2019 at 16:22
Should homeowners insurance cover the cost of the home?
I noticed a lot of them are only quoting me for about 90% of what I'm paying for the house.
The coinsurance clause can range from 80 to 100%. There is an underreporting penalty for paying too little for the insurance coverage you have agreed to.
Selling you more insurance increases the amount that you pay, and any commission.
There is an 80/20 rule: If your insurance doesn't cover 80% of the replacement cost of the home the insurance company won't pay 100% of the replacement cost.
Having you pay more than 80% allows a buffer incase the cost of rebuilding goes up. Wages and the cost of materials increase, you don't want to be caught short or you'll pay the balance instead of the insurance company.
Sources:
AnswerFinancial - Agent’s Corner: Why you should insure your home at replacement value rather than market value
Investopedia - How does the 80% rule for home insurance work, and how do capital improvements affect it?
TheSimpleDollar - The Complete Guide to Home Insurance
Don't mix the actual replacement cost for the building with replacement costs for the contents (theft or fire, etc) and don't think that the land might not need repair in the event of flood or sewer backup.
You need to have enough insurance for each situation (home / liability / theft / whatever) so that you can either get a new replacement or be satisfied with the deprecated value (and go without replacement of your possessions).
It's up to you to regularly reassess the value and update your insurance, if you leave it to the date of your claim and your not fully covered you won't be fully paid. Make certain to understand the coinsurance and always report changes to your insurer. If you remodel your home or build a new deck, anything that increases the value, it's your responsibility to inform your insurer.
I once owned a little old house on a large inner city lot. I sold it to a developer who only wanted it for the land, and demolished the house. So the vacant lot was worth more without the house because of the cost of demolition. But while I owned it, I was paying insurance based on replacement cost of the house because the mortgage company required it. In your case the land value seems to be much less in proportion to the house, accounting for the 10% difference.
I am going to give an answer that is "just technical help". In particular, although it's US-specific, you should be able to translate it to your country's practices.
I've seen several answers and comments here that indicate that indicate that many people think homeowners' insurance is essentially fire insurance. That is not the case. I don't think you can buy straight up fire insurance any more, you have to buy multi-peril insurance. This insurance pays if you have any of several losses. So the first thing to look for is if the policy pays if you have a loss in any of these categories: (policy lists categories). Those are inexpensive policies because they cover a limited number of losses. (Named coverage policies, for obvious reasons.) The other kind is called a named exclusion policy, because they cover any loss you have EXCEPT for the ones on the list: (policy lists exclusions). These are called named exclusion policies. These cost more but are better. (And of course lead to the exciting world of litigation over whether mold is covered.) It's hard to find named coverage policies in the US but I don't know if they're illegal or not. And of course, many commercial insurance policies are named peril policies. Policy for this, separate policy for that, third policy for another thing that's very similar to the first two. No wonder they hire risk managers.
Anyway, the biggest portion of your premium is "all cause damage to structure". But then there's sewer backup (a surprisingly large number of claims, and the damage can easily hit $10,000, and it's a named exclusion: but there's an inexpensive rider available). There's liability insurance. (That's when the neighbor slips on your step and sues. It turns out it also covers when your kid shoots the neighbor. The limit is probably $100,000.) The jewelry limit is $500 - $1,500 (depending on company) but you can "schedule" your valuables, which means that you have to notify the company that you have them and (again depending on the company) possibly pay a premium to cover the risk of loss. You also might be required to show that you have a safe place to store them. (What, you thought you could just hang your Monet on the wall and then expect them to pay when it walked away?) Earthquake coverage is extra, even here in TN. (Last earthquake that did damage was 1814.)
You can trust an agent to make the right decisions for you. You can trust the internet for advice. Or you can start learning what are the important things to cover.
For coverage, it's easy to decide whether you need to insure something or not. Can I afford to replace it? If not, then I need insurance to help me replace it (or to live without it). There is one caveat: who knew that their insurance policy didn't cover sewer backup? In order to know that, you'd have to read your policy. It's not on the dec page. It's on page (mumblety-mumble), the page with all the exclusions. Then you have to find out that your company offers a rider to cover that exclusion. (For every exclusion, you can ask whether your company offers a rider to cover the exclusion.)
One possible solution would be to just go with a reputable company for the first year (buying a house is a big deal anyway) and take the risk that you're overpaying for insurance. Do let the agent know you want sewer backup coverage, and if you have any valuables you'll need to get them scheduled. The agent will know what to do. Deal with insurance issues the second year.
There are also riders that will automatically keep your coverage at replacement cost. Yay! A rider to automatically increase my insurance amount (and premium).
