Rebuilding/Restoring Your Home After an Insurance Claim
It's a long, complex process to repair a damaged home. And living through the claims process, followed by the time to rebuild, is a challenge.
The value of home insurance is often higher than the cost of new construction or the purchase price of the home. If you own a home and pay to insure it, you may wonder why.
The reason is the many costs that will come up when a home needs to be rebuilt. The difference between the value of your home and the value of the insurance is due to these costs.
The cost to rebuild a home after major damage will often be much higher than its market value.
Costs to rebuild include materials, rush labor charges, specialists' fees, a temporary home for you and your family, and more.
Be sure your home insurance policy includes replacement cost coverage for your home.
Go over your options with your agent to be sure you agree about your home's market and replacement values.
What Happens When You Rebuild a Home?
The claims process for a home that needs to be rebuilt has a lot of steps. Knowing what these are will help you understand why reconstruction costs or the amount of insurance on your dwelling seems so high.
No matter what caused the damage, if your home needs to be rebuilt, it's in bad shape. This type of damage is often due to water damage after a fire. That's because so much water is needed to put out a house fire.
When your home is damaged by fire and water, you don't just need to worry about the house. You'll have to arrange your life around the damaged house. Some things you need right away will be:
A place to stay
New clothing for your family
Replacements for essential belongings
You'll need experts to assess the damage and construct a plan to rebuild or fix your home. Given how disruptive a damaged home is, you may not have time to shop around and find the best price.
Instead, you might be looking for a crew that can drop their current projects and come to your rescue. Whoever you choose will need to adjust their own work schedule. This costs more than standard home repairs or building.
What Other Costs Can You Expect?
The cost of hiring a crew is just one of the things that might be more expensive for home repairs after severe damage.
A big part of disaster cleanup is taking away and disposing of debris. You will also have to pay for materials and supplies used to rebuild your home. If it's a rush job, getting the materials there may cost extra.
Most construction companies have contracts with local labor and supply companies to handle these logistics. These businesses are also managing overall supply and demand.
This is the main difference between new construction costs and rebuilding after a disaster. With new construction, a contractor can take their time to find the best prices and builds things on a planned schedule.
When you rebuild after a disaster, though, you don't have time to shop around. You want to be a priority and get things done fast so your life can get back to normal. Making that happen can be costly.
Will You Need Specialists to Rebuild?
You might not know that specialists are often required for a home rebuild. Reconstruction specialists, such as post-disaster contractors and architects, often need to be part of the planning process.
Who you will need to hire depends on the work you want to do. It can also change based on the extent of the damage to your house, property, and belongings. You might have to hire specialists to deal with:
Landscaping or outdoor structures
Often, each of these professionals will need to be hired one by one. The cost of working with each of them can add up.
How to Get Replacement Cost Coverage
When you purchase a home, you will need to buy homeowner's insurance. When you do, make sure the insurance company includes a rebuild cost as part of your plan.
This should be able to cover a full rebuild. This is often written as "dwelling replacement cost."
A home should be insured to value. This is not the same number as the real estate value or tax value. It is the reconstruction value based on an appraisal or calculation.
Before you sign a policy, you should also understand the coverages you choose and the basis of a claim settlement.
What Are Dwelling Coverage Options?
You can choose what kind of coverage you buy as part of your home insurance policy. You may also want to ask your agent about other clauses or options that you can include.
Each of these options will increase what you pay for home insurance. But they may also save you a lot of money down the road if the worst happens.
Some insurance plans may already include one or more of these options as part of their basic policy.
Inflation is one type of protection clause in an insurance policy. Inflation might mean that in a few years, your payout no longer covers the full cost of a rebuild or repair after damages.
An inflation clause increases your payout as the value of the dollar goes down. This will adjust your claim based on the current rate of inflation.
Guaranteed Replacement Clause
A guaranteed replacement cost is another option. This clause promises that your home is covered by your plan. It protects you from having to pay your own way even if the rebuild costs run higher than the quoted estimate.
Extended Replacement Clause
An extended replacement cost is an option on an insurance policy. This guarantees additional coverage of replacement costs up to a certain percentage of your home's value.
If you had to replace your home, the provider would increase the amount they give you if costs exceed your limits.
If you suffer a major loss, you may prefer to take a cash settlement so you can build or buy a new home somewhere else. Cash-out coverage gives you this option.
A cash-out option is often offered on homes with higher values, custom homes, or older homes. This option becomes useful when the materials needed to rebuild are not readily available. It may also apply if construction standards have changed a lot since your home was first built.
Actual cash value is not the same as the cash-out option. Actual cash value is a depreciated value. This means it goes down as your home ages or if the market goes down.1 You should not get an insurance policy that uses actual cash value unless you would be content being paid an amount that won't rebuild your home.
You may find that your insurance company does not offer the kind of coverage you want. In that case, you should shop around.
Every insurance company has its own target markets. You could save or gain thousands of dollars on your claim payout if you take the time to compare plans and find the best one for you.
What if You Disagree With the Appraisal Report?
Reconstruction costs are different than real estate value. They are also not the same as the cost you could sell your home for.
When your insurance company does an appraisal of your house, they will come up with a number that they feel is right for your coverage. When this happens, it's possible for the appraiser to make an error in coverage amounts.
If you think this might be the case, contact your agent. You can work with them to understand the figures or have them adjust the policy.
If you feel your provider is using the wrong value and they won't talk about changing it, you can file a complaint with your state consumer protection office.
Understanding how reconstruction costs are set can help you negotiate when you're searching for a policy. If you feel your home is under or overinsured, work with your agent to make sure your coverage is exactly what you need.
Don't wait until your home needs to be repaired or rebuilt to ask questions about coverage. It is much better to talk to your agent to understand and adjust your coverage when you are first getting your policy.