Home/Earthquake insurance: for rebuilding or paying off mortgage? (housing, construction, value)

[smozes]

We are considering earthquake insurance. Talking to an insurer, it occurred to me that although it's often described in terms of rebuilding, in case of a total loss the insurance will actually pay the bank holding the mortgage first, and give me the remainder after the deductible.

We may be freed of the mortgage, but how will we pay to rebuild? A new mortgage can only be used to buy an existing house, not build a new one. What am I missing?

[BoBromhal]

what's your economic loss?

the cost to build the new house minus the loan you owed already.

the Bank will gladly make you another mortgage, call it the same amount as the last one.

[Lacerta]

Insurance isn't intended to allow you to have a new house debt free, it is intended to make you whole so you don't have a loss. If it paid off the mortgage AND paid for a new house, it would be doing the former. By paying off the loss on the old house and giving you the difference, it is doing the latter.

So either you or the builder you hire would get a construction loan, and then either you would roll that to a normal loan when the house is done, or you would buy the house from the builder and take a normal loan at that time.

You should check, and not just assume that either that, or other insurance will cover your housing needs while you buy/rebuild a new house. Also, whether demolition costs are covered so you can clear the land to rebuild.

[aridon]

Insurance is designed to put you back in place to how you were before the loss. Certain scenarios make that harder than others and even impossible so mileage varies depending on the loss and who pays it.

I'm not familiar with Earth Quake losses, however flood losses which are covered through NFIP are generally considered one of the worse types of losses to have. You rarely come out whole, especially since contents is covered at ACV right off the bat. Anyway I only mention that as I'm not sure if they pay for Earthquakes or if that is just private insurance or some other state pool which handles it. The rules are often different for pools.

In general, your home gets damaged, gets fixed and you're out only your deductible. Reality is seldom that simple but for the most part that is how it works.

In the case of total losses, it gets really complicated.

Generally speaking, when your house is a total loss, there is a section of your policy which covers removal and demolition in addition to the value of the structure remaining. This is called "law and ordinance" coverage on the ISO form.

Now on most policies in this area, you get 25% of what the house is insured for. Depending on your loss that is likely not enough for a total loss scenario in the event half the house burns down and needs to be demolished. Just the value of the remaining structure will push the limit, must less tear down and removal of the remaining portion.

IF you are really worried about total loss, especially one that might leave your home with severe damage but mostly leave it intact, law and ordinance is very important.

Other losses that are not total losses are paid out like this:

Damage Estimate
Less recoverable depreciation
Less non recoverable depreciation (think your roof that is 15/20 years old)
Less deductible

You get a check for the total above.

When you go to replace the items, you get the recoverable depreciation back as well as any cost over runs on the original estimate. You are out the deductible and any depreciation on the items they ding you for due to use over the years. Companies don't always use non recoverable depreciation for everything but you're most likely to see it on a roof that is near EOL.