Rebuilding Your Home After an Insurance Claim

a home in the rebuilding process
••• Jodi Jacobson / E+ / Getty Images

You never really know what it's like to repair or rebuild your home after damages until you've lived through the claim and rebuilding process. New and seasoned homeowners alike often look at their insurance policies and wonder why the insurance value is higher than the cost of the new construction or the purchase price.

Simply put, the difference between the insured dwelling value or reconstruction cost on your home is due to the different costs that will be incurred when a home needs to be rebuilt.

Home Rebuilding Considerations

To understand why reconstruction costs or the amount of insurance on your dwelling seems high, you should understand everything that needs to happen in a claims process.

Regardless of the cause of damage, your home is going to be in bad shape. Much of the damage to homes comes in the form of water damage after a fire, because of the amount of water required to put it out.

When your house is damaged by fire and water, your life is in disarray as well. You'll have to rearrange your life around the damaged house—you'll need somewhere else to stay, clothing replacements for your family; and the belongings that were a priority in your life will need to be replaced.

You'll need experts to evaluate the damages and construct a plan to rebuild or fix your home. You may not have time to shop around and find the best price; you'll need a crew to drop their current projects and come to your rescue. This costs more than regular home repairs or maintenance, as companies will need to make adjustments as well.

The Costs of Replacement

Removal and disposal of debris is another cost involved in damage and disaster cleanup. Generally, home construction companies have their supplies and logistics lined up for upcoming projects. In the case of a damaged home that needs to be rebuilt or repaired, supplies need to be redirected or ordered.

Most construction companies have contracts with local labor and supply companies, who are also managing supply and demand on a wider spectrum. This is the main difference between new construction costs (where a contractor takes their time to negotiate prices on materials and builds things on a planned timeline) and the reconstruction cost of a home after a disaster. Interrupting these processes can cause home supply prices to temporarily rise for your rush repair job, as you might be paying for priority.

Claims Specialists Involved in Reconstruction

Most people are unaware of the specialists that may be required for a home rebuild. A rebuild may require specialists such as:

  • Reconstruction specialists, post-disaster contractors, engineers, and architects
  • Mold specialists
  • Specialists for any custom work
  • Debris removal and storage for any items that are salvaged
  • Special landscaping work following the loss—such as pools or architectural decorations

Require Replacement Cost Coverage

When you purchase your home, you should make sure the insurance company indicates a rebuild cost on your policy that meets possible requirements for a full rebuild. This is typically referred to as dwelling replacement cost. A home should be insured to value, which is different than the real estate value or tax value—it is the reconstruction value based on an insurance appraisal or calculation. You should also understand the coverages you choose and the basis of a claim settlement.

Dwelling Coverage Options

You have choices as to what kind of coverage you purchase as part of your home insurance policy. You might want to ask your insurance representative about additional clauses or options.

Inflation protection clauses are features in an insurance policy that increase benefits as the value of the dollar goes down. These clauses adjust your claims based on the current rate of inflation, which might keep your policy from covering the full amount needed for a rebuild or repair.

A guaranteed replacement cost is an option that fully guarantees that your home is covered by your insurance policy, even if the rebuild costs run higher than the quoted estimate.

An extended replacement cost is an option on an insurance policy, which 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.

A cash-out option is insurance coverage that is generally offered on higher valued homes, custom homes, or older homes. This option becomes useful 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.

Cash-out coverage can be a tremendous advantage if you suffer a major loss and would rather just take a cash settlement and rebuild or buy a new home elsewhere.

Actual cash value is a choice that is not the same as the cash-out option; since actual cash value is a depreciated value, it is probably the least desirable of all insurance options in terms of what you get in a claim. You should not settle for a policy that has the basis of claims settlement as actual cash value unless you would be content with being paid an amount that wouldn't rebuild your home.

The actual cash value option can be a dangerous financial choice. If real estate values plummet, and your home is damaged, you'll likely be left at a value far below the price you paid for the house.

If your insurance company does not offer the kind of coverage you want, make sure you shop around. Every insurance company has its specific target markets, and you could save or gain thousands of dollars on your home insurance claim payout if you buy the best policy available.

If You Disagree With the Dwelling Value of a Home Appraisal Report

Reconstruction costs are different than real estate value or the cost you could sell your home for. It is also possible that there was an error made when calculating coverage amounts. If you think this might be the case, there is no reason to not contact your insurance company and work with them to understand the figures or have them adjust the policy.

Understanding how reconstruction costs are determined can help you negotiate with an insurance company when you're searching for a policy. If you feel your home is under or overinsured, you should be able to work with your insurance representative and make sure your coverage is exactly what you need.

If you cannot work with your provider, you are able to file a complaint with your state consumer protection office.