Should You Rebuild or Repair Your Home After a House Fire?
If your home has been damaged or destroyed in a house fire, then you have many important decisions to make. One of the biggest decisions is whether to rebuild or repair your home.
In some cases, your home needs to be razed and rebuilt after a house fire. There’s too much damage to the home, including structural damage that has permanently compromised the safety of the home.
In other cases, your home can be safely salvaged and repaired to pre-loss condition.
Insurance companies will push for the cheapest option. However, the cheapest option may not be the best choice for you, the homeowner.
Should you rebuild or repair your home after a house fire? Who decides whether to repair or rebuild your home? Keep reading to discover everything you need to know about repairing or rebuilding your home during a fire loss insurance claim.
How State Laws Protect You During Insurance Claims
Many states have passed laws protecting policyholders from greedy insurance companies. 20 states, for example, have passed valued policy laws. These laws allow policyholders to obtain fair compensation for their damaged home without jumping through hoops.
Each state’s valued policy law works differently. However, most states have a valued policy law that works similar to the following:
When the home should be considered a total loss, the homeowner no longer needs to prove the value of the home, such as Actual Cash Value (ACV), and the insurer must pay the full policy limit for the dwelling.
In some states the valued policy laws will apply when the cost to repair a home exceeds 51% of the home’s insured value. In many states, the valued policy laws only apply to certain causes of loss (perils), such as fire or lightning.
Some states have stricter laws. In California, for example, policyholders now have the right to collect all benefits that would have covered rebuilding your destroyed home then use those benefits to buy a replacement home. In other words, insurance companies in California must pay the same amount they would owe to rebuild your home and let you use those funds to buy a home instead.
In other states, things can be less clear. Many fire damage insurance claim disputes arise from the repair versus replacement issue. Insurers push for the cheapest option, while homeowners want the option that’s best for them.
Replacement Cost Value Versus Actual Cash Value
To understand the cost of repairing or replacing your home, it helps to understand the difference between replacement cost value and actual cash value.
All homeowners insurance policies have either replacement cost value (RCV) or actual cash value (ACV) coverage. RCV plans are more expensive and can provide additional compensation after a loss.
Replacement Cost Value: RCV coverage compensates you based on the dollar amount it would cost to replace or repair your home with a home similar to the kind and quality of the home you lost. The insurance company does not apply depreciation to these costs because you need brand new materials to calculate costs.
Actual Cash Value: Actual cash value coverage compensates you based on the fair market value of your home on the day before the loss. In other words, it’s the actual value of your home based on the price a willing buyer would have paid a willing seller. Some homeowners insurance policies have other definitions (like RCV minus depreciation).
The ACV of your home will not exceed the RCV. ACV includes the depreciation or your home and its building materials, while RCV does not. There is generally a significant gap between RCV and ACV, although the gap may be smaller on newer homes.
Other Types of Homeowners Insurance Coverage
Some homeowners insurance policies have other coverage options beyond RCV and ACV. Some homeowners insurance policies have building code coverage or extended replacement cost coverage, for example.
Building Code Coverage: With building code coverage, your insurer pays for work and materials required to improve your home to comply with building codes and laws in your area. A standard home insurance policy will not pay for improvements to your home. However, building code coverage could cover the cost of certain improvements after a loss.
Extended Replacement Cost Coverage (ERC): Extended replacement cost coverage provides extra coverage above your dwelling limit after you experience a loss above that limit. You may pay extra for this coverage (via a rider or endorsement). With ERC, you could get compensation that’s 25%, 50%, 75%, or 100% above your dwelling limit, giving you more compensation when needed most.
Your Insurer Will Likely Push for the Cheapest Option
Your insurance company is a for-profit business. The company wants to make as much money as legally possible. To do that, your insurer will almost certainly push to pay the lowest possible amount of compensation for your home and its possessions.
When deciding to repair or replace your home, your insurer will push for the cheaper of the two options.
Who Decides to Repair or Replace a Home?
The days following a fire damage insurance claim can be confusing. Homeowners have many decisions to make, and it’s difficult to know which decisions are the right ones.
So who decides to repair or replace a home after a house fire?
Ultimately, there is no single authority deciding to repair or replace a home after a house fire. With most insurance claims, it comes down to whichever party presents the best evidence in favor of a particular decision.
If you demonstrate the greatest will and present the most compelling evidence, for example, then you should be able to repair or rebuild your home (whichever is in your best interest).
Alternatively, if the home insurance company has greater evidence and stronger will, then they could force homeowners to repair or rebuild your home.
This is where many fire damage insurance claims enter a grey area. Insurance companies will point to parts of your policy and argue for their case. You (or your lawyer or public adjuster) will point to legal precedents to support your case. Like many major financial decisions, it can become messy.
If you need help with a dispute or disagreement with your insurance claim, contact a qualified Fire Public Adjuster for a free consultation.
Some House Fire Repair or Replacement Decisions Are Easy
In some cases, there isn’t a debate on whether to repair or rebuild your home.
Your home has been damaged significantly in a fire to a point where it cannot be repaired. In this case, the destruction is complete, and there should be little issue arriving at a full settlement from your insurer.
In other cases, house fire insurance claims are more complicated, and there’s considerable debate whether to repair or rebuild your home.
The Cost of Rebuilding a Home is Generally Higher than Its Market Value
In most situations, it costs more to rebuild a home after major damage than the market value of that home.
When rebuilding a home, you need to cover expenses that aren’t considered within the actual cash value of the home, including rush labor charges, material, specialists’ fees, and the cost of temporary accommodations for you and your family.
How to Get Replacement Cost Coverage
Some homeowners insurance policies only include actual cash value (ACV) coverage. These policies tend to be much more affordable.
With these policies, the insurance company can simply give you a cash payment for your home after a loss based on its actual cash value. This cash payment is based on the ACV of your home, which is less than the replacement cost value (RCV). The insurer always chooses the cheapest option, which is why the insurer will push for ACV instead of RCV.
However, many homeowners insurance policies have RCV coverage. In some policies, it’s listed as dwelling replacement cost. If your policy has RCV coverage, then your policy includes coverage for a rebuild.
Ultimately, insurance experts recommend insuring your home to its value. A home’s value isn’t the cost a buyer is willing to pay for the home the day before a loss. Instead, a home’s value is the reconstruction value based on an appraisal or calculation.
Dwelling Coverage Customization Options
When buying dwelling coverage (also known as replacement cost coverage) for your home, you’ll encounter multiple customization options. Your policy could have clauses for inflation, for example, or guaranteed replacement.
In some cases, these clauses are included by default. In other cases, you need to add them to your policy.
Inflation Clause: Inflation clauses protect the value of your insurance payout from inflation. If you insured your home for $250,000 today, for example, then that value may not be the same in 10 years, when the purchasing power of the dollar has dropped. As the value of the dollar drops, your payout increases due to the inflation clause. You might receive $250,000 plus an added amount based on the rate of inflation.
Guaranteed Replacement Clause: Some replacement cost policies have guaranteed replacement clauses. With a guaranteed replacement clause, the insurer guarantees that your home’s replacement cost is covered by your plan. Even if the rebuild costs are higher than the quoted estimate, your insurer guarantees replacement costs for your home.
Extended Replacement Clause: An extended replacement clause guarantees additional coverage or replacement costs up to a certain percentage of your home’s value. Under this clause, the insurer increases your payout if costs exceed your limits. You can typically choose extended replacement cost amounts like 25, 50, 75, or 100%.
Cash Out Clause: Sometimes, it’s in your best interest to take a cash settlement on your home, allowing you to build or buy a home elsewhere. If your insurance policy has a cash-out clause, then you have this option. A cash-out option is common on homes with higher values, unique and customized homes, or older homes. If the materials needed to build your home are not readily available, or if your home had unique value, then you may want to add a cash-out clause to your home insurance policy.
Dwelling coverage customization options can impact whether to rebuild or repair your home.
A Thorough Scope of Loss is Crucial for Your Claim
Above all, the most important thing to remember with fire damage insurance claims is the importance of a thorough scope of loss.
A good scope of loss could be the difference between repairing or replacing your home.
A thorough scope of loss requires extensive documentation of the items damaged during your loss and the value of those items.
Insurance companies will often challenge these claims at every step of the way. If you claim it costs $1,000 to replace your couch, for example, then your insurer could find a similar couch from Walmart priced at $200. Through these methods, the insurer can significantly reduce the compensation they pay for your insurance claim.
Hire a Public Adjuster to Receive Fair Compensation
For larger insurance claims (with the disputed amount over $10,000), it may be in your best interest to hire a public adjuster.
A good public adjuster fights for higher compensation on your behalf, pushing for you to receive the highest possible amount of compensation as listed on your insurance policy contract.
Your insurer signed a contract with you to cover the value of your home and its possessions. Insurers have a legal obligation to meet. When insurers fail to meet that legal obligation, they can face penalties. That’s where public adjusters can help.
If you are concerned about repairing or replacing your home, or if you’re worried about receiving fair compensation for your home after a major loss, then talk to an experience Public Insurance Adjuster.
Stephanie is a property insurance claim expert with over 20 years of experience working as an insurance adjuster, expert witness, appraiser and umpire. She is passionate about sharing her expertise, knowledge, tips and training to help both property owners and Public Adjusters in their pursuit of effectively managing claims and recovering the claim settlement they deserve after a loss.
