Losing Your Home in the Fires: Replace vs. Move On

house burning down

Homeowners affected by the great fires in California, Washington, Oregon, Idaho, Utah, Montana; homeowners affected by hurricanes and tornadoes in Louisiana, Texas, up the eastern seaboard states; and homeowners in other states where they lost their homes to natural disasters all share, among other heartaches, the decision whether to replace their houses or move on to different venues. A Money.cnn.com article (dated September 1, 2017, quoting CoreLogic, a property analytics firm) predicts that between 25 billion and 70 billion dollars’ worth of flood loss will be incurred in just Southwest Texas and Southwest Louisiana. An article in “LA Times” dated November 12, 2017, stated that in Sonoma County, California, approximately 13,000 debris removal claims were submitted to FEMA (Federal Emergency Management Administration) while another 5.8 million was advanced by the government, with another 7.9 billion–yes with a B–being requested from Washington to fund long-term recovery efforts. This was due to the horrendous fires which ravaged many more counties than just the one cited. In these moments of anxiety and uncertainty the last thing we want to deal with is the emotional stress of finding another place to call home.

Having so much of our lives spent in building close relationships with neighbors, business associates, club members, people we worship with, and people we commerce with makes it difficult to just pack up and move to some other Shangri-La or Camelot. How do you tell your teenage daughter who has found her first love she won’t be going to the Senior Ball with him–or your son who is just one merit badge away from being able to have his Eagle Court of Honor with his closest buddies–or child who just auditioned and was awarded the leading role in the high school play of “Romeo and Juliet”? All those affected in these natural disasters are now in the throws of the dilemma of replace or move on.

The choices they have to make are very limited in having insurance participate in settling their losses. The one which would expedite their claim the quickest would be to settle for an actual cash value settlement. This would mean determining the replacement cost of the home, subtracting depreciation factor and deductible giving actual cash value. A couple of things to consider:

  1. Will there be enough cash left over after paying the mortgage off to allow one to move and begin anew; or,
  2. If one doesn’t have sufficient to pay off mortgage holder, will the mortgage holder allow you to pay off what you can and then continue to carry the note on an uncollateralized basis: or,
  3. Will the existing mortgage holder allow you to move to new location and use that new location for the collateral on a new loan with the unpaid previous loan balance being rolled into new loan; or,
  4. Could you qualify for new loan of a greater amount than previously, thereby not being limited in what and where you would build back.

If you were top heavy in your loan, cashing yourself out may not even be a course you could consider. Lending institutions are not very interested in getting into a circumstance where they could have substantial loss in the event someone forfeits on their commitment. A point to note here is market value, appraised value, replacement value and actual cash value are different ways of assessing your investment. Market value generally would be the amount you could reasonably sell a home for, appraised value is the amount you would use for calculating taxes, replacement value would be the amount you could expect to pay when there is an insurance claim, and actual cash value would be an adjusted settlement from replacement cost value. The big issue to deal with in an actual cash value settlement is the issue of depreciation. It is not a scientific method because there are so many variables which cannot be standardized. Both the client and the adjuster would be well served if none of the claims would have to be settled this way.

This then leads to the preferred method of settling the claim and that is the replacement provision. This can be a replacement based on guaranteed replacement or increased replacement depending on how contract was written. In both cases, replacement provision gets rid of the depreciation factor if certain criteria is met as explained below.

Most prominent insurance carriers have a provision in the contracts which states in laymen’s terms in order to get replacement coverage on your home you must have had the home insured to at least 80% of replacement cost prior to the loss; until the home has been replaced company only required to pay actual cash value( replacement cost minus depreciation minus deductible) and then the balance of coverage to bring it to replacement value when repairs are made at the same location as where the loss occurred. Any replacement structure must be of a similar type and use.

The increased replacement provision is a wonderful hedge against inflation. If at the beginning of the policy year, the company and insured agrees home is insured to 100% of its replacement cost then if inflation drives the cost up, the actual coverage will go up to an additional amount over the amount showing on declaration page. This increase is normally 25% more than declared on policy. Check with your agent to see if you have this coverage and if not how do you qualify to have it.

What if you decide you want to move elsewhere? It is your right to do so but there are some concerns to be addressed.

If insured desires to move on then the insurance company will settle claim based on actual cash value with no reserves set aside for later compensation. Any settlement check would be made out to you and the mortgage holder and you both would determine who gets what.

If you owe less than the loan amount, mortgage holder would simply want their interest protected by keeping a lien against the new dwelling or they may want to be cashed out leaving you with remaining settlement monies to rebuild as you desire. If on the other hand you owe more than the actual value of your home, the mortgage holder is going to want to remain on policy so their interest would still have first position in the event you were to have another loss. They would require you to rebuild and you would have to build in same location in order to meet the policy requirements. In speaking with a senior claims adjuster for a major fire insurance company, the author was told there would not be much if any chance of the insurance company waiving the requirement of rebuilding in the same location just so the client could get a new start somewhere else. There may be an outside chance this provision would be waived if some government ordinance could somehow supersede contractual language but highly unlikely.

What is the best choice can only be answered by you but I bet those people who lost their houses by events mentioned at beginning of this article are glad they were insured and now have some options in their grief.

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