What to Expect in a Home Insurance Claim When You Have to Rebuild

Building a New House is Exciting, Rebuilding After a Claim is a Nightmare

Building Dwelling Insurance Amount Understanding Replacement cost and Insured Value
An Easy Way to Understand Replacement Cost and Dwelling Insured Value. Jodi Jacobson / E+ / Getty Images

You never really know what it is like to repair or rebuild your home after a claim until you've lived through it. People often question where the cost of reconstruction or the insured dwelling value comes from. This question is especially perplexing when someone has just built a new home and their insurance value comes out higher than the actual cost for the new construction.

Here's a really easy way to understand the difference between insured dwelling value or reconstruction cost on your dwelling home insurance compared to construction costs in normal circumstances, like having a contractor build a new home.

Have You Ever Had to Clean Up a Really Big Mess?

A home insurance claim is just that, a really, really big mess. If you have never lived through a claim, you get this sense that you're insured, so if anything happens you'll be okay. In a way, this is accurate, but the perception that everything will suddenly be okay couldn't be farther from the truth.

To understand why reconstruction cost, or the amount of insurance on your dwelling seems high, you need to get into the mindset of understanding what really happens in a claim.

Your Home Insurance Has to Provide Enough Coverage for All the Rebuilding Costs

Regardless of the cause of damage, first understand that damage causes a big mess. Whether it is water damage soaking into your walls and floors, a big hole in your roof, tornado or windstorm damage, or a fire causing not only fire damage but water damage as well. All of it is messy.

Now forget about the actual mess, what happens to you in this claim is even worse, you have to rearrange your whole life around this mess.

You have to have all kinds of strangers in your home: experts to evaluate what they will do to fix the problem and rebuild.

You don't want to shop around and find the best price; you want an emergency crew to drop everything they are doing and come to your rescue.

Then you need to have people come in and clean up the mess before you rebuild.

This is where the cost of debris removal comes in and more emergency contractors. Once the mess is contained, things are patched up and the work of rebuilding things the way they were before starts.

Materials need to be found; workers need to be hired, and all of this needs to happen fast because you want to be back in your home, with all the things you need around you as soon as possible.

Why Insured Value is Different than the Value You Paid to Build Your Home

This is probably the most difficult question for people to understand when there is a discrepancy between the insurance value and the price a person just paid to build a home.

The difference between construction cost, where a contractor takes his time to negotiate prices on materials and builds things in their entirety on a planned timeline, and reconstruction cost of a home after a disaster is totally different. When calculating reconstruction cost or dwelling value, the insurance company knows that there is urgency in the need to get work done and to find materials. There is no time to shop around for several months to find deals and sales on everything you need to be done. Or to get your guy who charges you half the price on things to become available.

You also can not wait several months for it to be convenient for someone else to work on their schedule, you need people in there ASAP to get your home back in order.

Do You Want to Cover the Cost of the Mess or Do You Want the Insurance Company To?

In a claim, believe me, you will be so appreciative of the expedited service you receive that you will have no problem with the fact that you insured your home properly. Where you will have a problem is if the money runs out before you're done building your home.

What Kinds of Claims Specialists Are Involved in Reconstruction vs. Building New?

People don't give a lot of thought to this factor, but the kind of specialists required to rebuild or reconstruct things are specialized. It is much more difficult to put the pieces together than to start with a fresh slate.

In addition, builders often work on specific schedules with pre-set plans, in the case of a rebuild, you will be asking for a custom job because the damage that will occur will be very specific to your situation.

  • Reconstruction specialists and after disaster contractors
  • Architects may be needed
  • Mold specialists and people with experience in controlling damage after water losses
  • Various contractors and specialists for the different needs of your home
  • Debris removal people, and storage people who will take any items that are salvaged into safe storage.
  • You may need special landscaping work following the loss depending on what kind of damage occurred

What Kind of Home Insurance Coverage Do You Need on Your Dwelling to Make Sure Your Home is Not Underinsured?

If you want to make sure the insurance company covers the full cost of your claim and is able to put you in the same position as you were in before the loss or damage happened, then you need to insure your home to value, which means not the real estate value or tax value, but the reconstruction value based on an insurance appraisal or calculation. You also need to understand the coverages you choose and the basis of claims settlement.

Dwelling Coverage Options

You have choices as to what kind of coverage you purchase as part of your home insurance policy. Ask your representative about:

  • Inflation Protection Clauses
  • Guaranteed Replacement Cost
  • Extended Replacement Cost
  • Replacement Cost Value With No Obligation to Replace: Cash Out Option. This kind of coverage is generally offered on higher valued homes, custom homes or older homes. It becomes important when the materials used in rebuilding may not be readily available or if construction standards have changed dramatically since the original construction of your home. This coverage can be a tremendous advantage if you suffer a major loss and would rather just take a cash settlement worth the value of your home and rebuild or buy a new home elsewhere, among other possibilities.
  • Actual Cash Value (ACV): Beware! Actual Cash Value is not the same as the cash out option since Actual Cash Value is a depreciated value, probably the least favorable of all insurance options in terms of what you get in a claim. Be very careful if you have an older home (or any home for that matter) that you don't take a policy that has the basis of claims settlement as actual cash value unless you would be content with being paid an amount that would NOT rebuild your home.

If the company you are insuring yourself with does not offer the kind of coverage you want, make sure you shop around. Every insurance company has it's specific target markets, and you could gain thousands of dollars on your home insurance claim payout if you buy the best policy available. You will also save yourself a lot of grief when you rebuild after a claim.

What If You Disagree With the Dwelling Value on a Home Appraisal Report?

Most people find it hard to believe the value to rebuild their home is as high as it is. The information we covered here should give you good insight into why reconstruction is different than real estate value or the cost you could sell your home for, it should also explain why rebuilding after a loss is completely different than building new, but if you are still not convinced, it is possible that there is some room for review by the insurance company, or that someone made a mistake in the calculation. Understanding how the reconstruction cost for the purpose of insurance is determined will help you negotiate better with the insurance company. If you feel your building is underinsured or possibly insured too high, you now have all the information you need to strike up a conversation with your insurance representative and make sure your coverage is exactly what you need.