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My House Burned Down. Will My Homeowners Insurance Pay off the Mortgage?

Posted : 07/11/2006

If fire destroys your house, a burning question might be whether your insurance would pay off the mortgage. Chances are the answer would be yes. However, there's a lot more to it than that.

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With that in mind, a hypothetical was brought up by American Insurance Association assistant general counsel Eric Goldberg. "Let's say you bought the house 20 years ago for $200,000 and at the time of purchase you obtained a homeowners insurance policy with $190,000 in limits, which is less than the property's total value because you don't buy coverage for the value of the land," Goldberg began. That house has appreciated in value considerably since the date of purchase, he said. Building costs, materials and other costs have gone up.

"Let's say you haven't increased my policy limits since the day you bought the house," Goldberg added. "If that's the case, you probably don't have sufficient coverage." What should a homeowner do to avoid facing such an unpleasant situation? "It would behoove you to meet with my insurance provider once a year to ensure you have adequate coverage," answered Goldberg.

"You don't want insurance surprises at a critical time such as in the event your house burns down," Goldberg emphasized.

Goldberg talked about how homeowners insurance for the structure itself is sold in one of two ways: replacement cost coverage and extended replacement cost coverage. At replacement cost, if you have $200,000 in coverage, you'll get the actual replacement cost up to that amount if your house burns down. "Extended replacement cost protection costs a bit more, but under that type of policy, the insurer provides you a cushion - typically 20 or 25% over coverage limits - to cover factors such as rising building costs and increasing costs of building materials."

A final point from Goldberg: "It is the policyholder's responsibility to find out what the replacement costs are."

"You are still going to have that same mortgage, but your homeowners insurance will pay to rebuild your home, and so you will be made whole," says Carolyn Gorman, vice president at the Insurance Information Institute's branch office in Washington, D.C.

Gorman's organization, the Insurance Information Institute, says you need enough insurance to cover the following:

  • The structure of your home.
  • Your personal possessions.
  • The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs.
  • Your liability to others.

Chubb spokesman Mark Schussel says your homeowners insurance policy should have adequate coverage to cover your outstanding mortgage. However, that may not be enough for you to rebuild. "What's more important is for you to purchase an extended replacement cost policy that regardless of your stated policy limits will provide you with enough insurance proceeds to replace the home in its entirety," explains Schussel.

Schussel's bottom-line point on the subject? "Most banks won't approve your loan application unless you have adequate insurance to pay off the mortgage," he said.

Says Safeco Insurance spokesman Paul Hollie: "If your house burns down due to a covered loss, homeowners insurance typically will pay to clear your property of damage and debris, rebuild your home, and replace the belongings you lost in the fire. In addition, if you can't live in your home, your homeowners insurance will pay additional living expenses as detailed in your policy. This covers the cost of temporarily renting a place to live."

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