After you've lost everything in a disaster, home insurance helps you pick up the pieces and rebuild.
But what if you'd rather buy another house somewhere else?
You file a
claim, sell the lot, buy another place and move on with your life. That might sound easier than the painstaking process of rebuilding your house from the ground up, but it comes with its own set of complications.
"You have to prove what you're entitled to," says Greg Raab, a National Association of Public Insurance Adjusters board member and manager of integrated services at Adjusters International in Utica, N.Y. "You have to dot your i's and cross your t's. It's not as simple as showing your receipts."
Whether you can use the full replacement cost -- the amount it would take to rebuild your home -- to buy a comparable house is not a surefire option, except in California, where a state law expressly gives consumers with replacement cost policies that right, says Amy Bach, executive director of United Policyholders, a consumer advocacy group. But even so, confusion and disagreements arise even in California.
"The big hole people seem to fall into is they can't reach agreement with the insurance company on that theoretical value [to rebuild]," she says.
Here are some of the questions that will arise if you're thinking about buying instead of rebuilding.
Do you own the home free and clear?
Any settlement will be made to you and the mortgage lienholder if you still owe money on your home. If the settlement is large enough to pay off the mortgage, then that portion goes to the lender and you keep the remainder for a down payment on another house.
"If the settlement is not enough to pay off the mortgage, then buying another property is probably off the table," Raab says.
What does your insurance policy say?
Most home insurance policies provide replacement cost coverage for the dwelling. In fact, a mortgage lender typically will require the homeowner to have replacement cost coverage, says Ronald Reitz, president of the National Association of Public Insurance Adjusters and president of San Diego-based Quality Claims Management Corp.