I am reviewing my homeowner's policy that is due for renewal and I think I may have too much coverage. My question: will the insurance company pay the coverage amount if the building is a total loss in case of a fire for example, or will they determine some other amount, based on an estimate, for example?

If it is the latter, reducing my coverage would be a no-brainer, if it is the former, then I will probably keep what I have.

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    what they will pay will depend on the actual details of the policy, and may also depend on the state you live in. – mhoran_psprep Jun 28 '14 at 20:00

It really depends on your policy, but generally the coverage is up to the stated amount. If your house is worth $5 but you insured it for $50000 - when it burns down you're likely to get back the $5, not the $50000. Because the insurance is for your loss, and you lost $5.

So in terms of home insurance, the insurance will usually be for a FMV of the house (i.e.: what it was worth before the loss, or what would a similar house cost at the time of the loss) or for the cost of replacement (i.e.: what would it cost to rebuild it). These are not the same. The amount of coverage on your policy is usually the upper limit, not the actual payout you'll be getting in case of a loss.

But again - read your policy and talk to an insurance adviser/lawyer for details.

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  • yeah that's reasonable, but the policy is not exactly casual reading. I was hoping there would be some general advice. I have replacement cost coverage and a yearly inflation adjustment, meaning the amounts go up while the actual value of the building goes down as it ages. The replacement cost does not go down, of course, so in a way this makes sense, but only if I actually get the amount that I am insured for. Town assesses the building value at $450K. My coverage for the dwelling is for $650k which is about what Zillow thinks the building only is worth. – Melkkuh Jun 29 '14 at 2:02
  • But I do think that the market value is very different from replacement cost - I could rebuild for less than the market value. This really is the reason for my question. – Melkkuh Jun 29 '14 at 2:09
  • @cdonner replacement value is generally significantly lower than the FMV, since the FMV includes the land (you're buying a new asset instead), while replacement value only covers the building (materials and labor - you're rebuilding on the land you already own). – littleadv Jun 29 '14 at 4:12

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