What Homeowners Should Know About a Large Loss

If your home is damaged by a fire, flood, or other disasters, you may be relieved to learn that it wasn’t totally destroyed. But it’s important to understand how your insurance coverage works. You may still be required to rebuild the entire thing or have expenses that aren’t covered.

What’s a “large loss”?

What exactly constitutes a large loss can differ from carrier to carrier, but in general it’s when there’s either significant damage to a major portion of a home or irreparable damage to a crucial part of the structure. For example, imagine flood damage that leaves the frame intact but undermines the foundation; the house may look fine, but it is no longer safe to inhabit.

Large losses can result in forced vacancies and the need for the home to be completely torn down and rebuilt. You should thoroughly review your insurance policy to ensure you are properly covered in the event of a large loss. Many homeowners are surprised when they submit a claim, only to find that their coverage has gaps, either in the perils covered or the amount of money the insurance company is obliged to pay.

Aside from understanding the perils covered by your homeowners insurance policy, you should understand the extent that personal items inside the home are covered, if structures separate from the home (such as a garage) are included, and what the limits are for additional living expenses if you are displaced from your home during repairs.

When is a repair or rebuild covered?

A standard homeowners insurance policy will typically pay to repair or rebuild a home if it is damaged or destroyed by fire, wind, hail, lightning, or another disaster specifically listed in the policy. Damage caused by a flood or earthquake is usually not covered in a standard policy, although fires that occur as a result of an earthquake can be covered (always check the details).

If there is a gap in coverage, additional insurance for earthquakes and floods is available. And in some regions, you may have special insurance needs for windstorms. Work with your agent to purchase these policies if your home is located in a flood zone, in a hurricane-prone area, or near an active fault line.

Surprises that might arise

Though each insurer is different, most will waive your deductible on a large loss — often claims that exceed $50,000. While that is great news, potentially saving you a couple of thousand dollars depending on your deductible, there are other issues you need to address to make sure a large loss doesn’t leave you short. Let’s look at a few.

Replacement cost: Most homes are insured to cover the cost to replace the structure and contents if there is a total loss. This is called “replacement cost coverage” and is a great way to comprehensively insure your home and belongings. The catch is that a home typically increases in value over time, especially if you make improvements to it, such as finishing a basement or building an addition. If your policy isn’t updated regularly, you may find you have underinsured your property, and that can leave you without adequate coverage and even expose you to a penalty from your insurer for “underinsurance.”

Widespread losses: Your insurance policy is written to cover repairs and rebuilding under normal conditions, but if a tornado or wildfire wipes out thousands of houses in your area, you may find the cost of labor and supplies skyrockets, making the budgeted “replacement cost” in your policy inadequate. There are enhancements you can make to your policy to build in a cushion for such events, so ask your agent about a “guaranteed” or “replacement cost” endorsement that can add a percentage boost for such events.

Rebuilding elsewhere: What if you decide you don’t want to rebuild on the same lot — that you want to move to a different place and build there? Many homeowners policies allow for that, though there may be restrictions on where you can rebuild and some may pay out only an actual cash value. It’s worth talking to your agent about these nuances.

Debris removal: A typical homeowners insurance policy has a percentage amount of coverage for debris removal- say 25% of the amount being paid for the damage to your home. That is usually sufficient to take away the trash, but if you need any kind of specialty treatment, such as removal of asbestos or other hazardous materials, you might encounter costs that exceed your debris coverage. Debris removal can also become an issue when there are downed trees. If they fall on your property but do not cause any damage, they might not be part of the insured cleanup costs. Ask your agent about possible solutions to cover these expenses, especially for debris that doesn’t involve direct damage to your structure.

Additional living expenses: If your home is damaged so badly you can’t live in it, a stipulation in your homeowners policy called “additional living expenses” will pay for accommodations while your property is being repaired or rebuilt. Some insurers pay this on a reimbursement basis, meaning you must pay to rent a place and your insurer will pay you back based on the receipts you submit — up to the limits of your policy’s coverage.

Building to code: Your home must be repaired to current building codes. This could mean that your entire house has to be rewired when only a third of the structure was burned. Talk to your agent about this scenario. If your policy doesn’t cover rebuilding to code, you can add this coverage, usually called “law and ordinance.”

Determining the extent of repairs

It’s not always obvious how much damage is done in a large loss. For instance, you may think you got off lucky because only the garage and laundry room were completely destroyed, but then you find out that the whole house has to be rewired, the entire roof has to be replaced along with all the insulation (which isn’t up to code), and the tree next to the house that was half killed has to be removed. This is where the adjuster plays an important role.

The insurance adjuster will inspect your property and provide you and your insurer with an estimate of the costs to repair. You may only need to make simple repairs to the damaged areas. However, it isn’t uncommon for damage to one part of a home to render the entire thing structurally unsound, requiring the home to be completely demolished and rebuilt.

Typically you will need to find a contractor to begin the work, though some insurers may require you to use an approved contractor. Establish an excellent relationship with your claims manager in large losses, because this person will help you understand all that is being done and all that is required of you.

The best step you can take today is to get with your agent to fully understand what your policy covers and if you need to close certain gaps. That way, should you suffer a large loss, you will be better prepared and better insured.

This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.