by woodworthfinancialmanagem » Tue Oct 12, 2010 03:38 pm
Criteria of "Replacement"
My elderly mother's house in NY suffered fire damage a few weeks ago, and I'm working with the adjuster; the dwelling can not be occupied until reconstruction of the top two floors and she's living in an apartment for the time being. After considerable HO research, and with help from this forum, we are down to a couple of crucial decesions: rebuilt or sell the dwelling as is. I believe that I have a good understanding of cruicial HO terms concerning this subject and the advantages of either a "depreciable holdback" for rebuilding or a "walk-away figure" if she opts to sell it as is. My question is what would HO 03 Loss of Settlement consider "rebuild or replacement" ? Does that mean she HAS to purchase another dwelling for the same rebuild cost (or more) in order to recapture her depreciation; can she decide to rent an apartment as replacement; can she buy an RV as a replacement? Your thoughts as insurance professionals?
Jim
My elderly mother's house in NY suffered fire damage a few weeks ago, and I'm working with the adjuster; the dwelling can not be occupied until reconstruction of the top two floors and she's living in an apartment for the time being. After considerable HO research, and with help from this forum, we are down to a couple of crucial decesions: rebuilt or sell the dwelling as is. I believe that I have a good understanding of cruicial HO terms concerning this subject and the advantages of either a "depreciable holdback" for rebuilding or a "walk-away figure" if she opts to sell it as is. My question is what would HO 03 Loss of Settlement consider "rebuild or replacement" ? Does that mean she HAS to purchase another dwelling for the same rebuild cost (or more) in order to recapture her depreciation; can she decide to rent an apartment as replacement; can she buy an RV as a replacement? Your thoughts as insurance professionals?
Jim
Posted: Tue Oct 12, 2010 04:59 pm Post Subject:
Rebuild or replacement simply describes the two possible forms of indemnity under the contract. To rebuild only the damaged portion of a structure due to a direct loss, or to have to replace the entire structure when it is impossible or unsafe to merely repair the damaged portion, or worse, would not be permitted by local law/ordinance (as an example, modern building codes could require that an entire structure's electrical wiring or plumbing be replaced as a condition of obtaining a construction permit, and it would be less costly to simply demolish and build new from the ground up -- some policies provide additional funds for such losses).
The main consideration is whether the policy limits allow the greater cost of demolition and replacement with new construction. But the insurance company is not required to pay for complete replacement if the damaged portion can be soundly rebuilt for less. The discretion is not usually left solely to the insured.
If there is no outstanding mortgage, considering "walking away" with the "ACV" and forgoing the holdback value is one of your options. The insurer will still pay the amount it is obligated to under the contract. You mostly only have to consider the consequences of trying to sell a property in need of major repairs compared to one that is whole.
If there is still an outstanding mortgage, the lender might allow your mother to walk away, but the insurance proceeds would be theirs, since the property is their security interest and they would not want to be left with something in need of repair and no money to pay for it.
Unless your mother's policy has some very unusual policy language, the contract cannot force her to continue to reside in the same location in order to obtain a claims payment. If the structure was a total loss instead, and the insurer was paying the policy's limits, your mother would still be entitled to take the money and relocate somewhere else with the proceeds -- to another home, an apartment, or even an RV -- rather than have to build a new structure and continue to reside in the same spot.
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