How Replacement Cost Insurance Benefits works

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When a claim is made on a Replacement Cost Policy, your insurance company is obligated to pay you upfront the actual cash value of your loss.  Let’s suppose that your house was severely damaged by a fire.  The cost to replace the house might be 450,000 for example until the loss is actually replaced your insurance company has no further obligation to pay you more money, even though they have yet to pay you what it will actually cost to replace your home.

To illustrate this, let’s suppose that it is going to cost a half-million dollars to replace your home due to a fire loss.  Suppose as well that your home was built some thirty years ago. The insurance company will not pay you upfront more than the depreciated value of your home.  For illustration, let’s presume your insurance company deems your house at the time of the loss to be worth sixty (60%) percent of the replacement value due to wear and tear.  That being the case, your insurance company is obligated to pay you upfront the depreciated (actual cash value) value of your home. In this example that would be $300,000.  Suppose you have no mortgage on your house, then the insurance company should write a check made payable to you for that amount of money.  You are free to do whatever you wish to do with that money.  You may wish to rebuild on your real property, or you may wish to do some other than rebuild your home.

What you are likely to be told by your insurance company id that when you rebuild your home to the way it was before the loss, the insurance company will reimburse you the Holdback up to the ,amount you actually spent but in case greater than the Holdback amount, which again in this illustration is $200,000.

Suppose however you don’t want to rebuild your house to the way it was before the loss, or suppose you want to build a completely different type of house on your property.  Suppose that you want to buy a different house and move.  What then?? Through my many years of experience I have come to learn that in most cases, insurance companies and those in the industry of dealing with insurance losses never tell an insured that there are other options.  In fact, the other options are spelled out in the insurance contract.  Unfortunately, most insurance contracts/polices are very difficult to read.  For example, they contain binding albeit confusing language that most folks don’t understand.  For that reason, before you sign a contract to rebuild your home, and/or assign your claim to a public insurance adjuster, etc., you should consult with an attorney that understands insurance policies.  That way whatever you decide to do, you know upfront what is available to you in order to maximize the amount to which you are entailed to under your insurance policy.

If you don’t have a lawyer that can assist you, feel free to contact me for a consultation. 

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