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Rebuilding your home after an insurance claim

Fact-checked with HomeInsurance.com

If your home is destroyed or damaged beyond repair, you have two choices—buy a new home, or rebuild. If you decide to rebuild your home from the ground up, your homeowners insurance will cover the cost, up to policy limits for reconstruction value.

No one expects to have to rebuild their home. Because of that, it’s important to have adequate dwelling coverage. The amount of dwelling coverage you have is directly correlated to the reconstruction value of your home. The higher your dwelling coverage, the more money you’ll have to rebuild your home.

What to consider when rebuilding your home

If your home is damaged or destroyed by a covered peril, such as a fire, your first step is to file a claim with your homeowners insurance company. An adjuster will visit your home in-person to assess the damage and determine how much money you’re eligible to receive based on the type of policy you have.

However, it’s important to know that the reconstruction value of your home may differ from the actual cost to fully rebuild your home. That’s because rebuilding can be very expensive when you account for things like labor and temporary living costs. 

Factors to consider

When a disaster occurs and your home is destroyed, it impacts your entire life. It’s not as simple as bringing in a construction crew the next day to start the work. Here are some other factors you should consider.

Additional damage

When your home is severely damaged, there are usually main damages and secondary damages. For instance, say your home catches fire and in the process of putting out the fire, the entire bottom floor of your home gets flooded. Now you’re dealing with fire damage and flood damage. On top of that, the flood damage could cause mold or rust. Additional damages can quickly drive up the cost of rebuilding.

Practical living impacts

While your home is being rebuilt, you’ll need to find somewhere else to live temporarily. Taking clothing and other personal belongings with you is a big part of the process. But if those items are damaged, you also have to account for their replacement. All of those decisions need to be made before the rebuilding process can start. Speak with your insurance provider if your policy includes Alternative Living Expense (ALE) coverage and how to take advantage of it.

Research

Rebuilding your home often involves a lot of research beforehand. You need to find contractors, construction companies, specialists, landscapers and other companies that are vital to the rebuilding process. As a homeowner, it’s up to you to research and hire those people, and compare costs between local companies. Insurance may request invoices or estimates from the contractors and subcontractors for the sake of payouts.

Costs to consider

The cost of rebuilding a home isn’t just about the cost of labor and construction. It requires researching and hiring contractors and construction workers, and accounting for labor costs that may exceed original projections. The price of materials and supplies can increase in an area affected by large natural disasters, such as hurricanes, which can be an added expense as well.

Additionally, many people don’t realize that specialists are often involved with the reconstruction process. Some of the specialists you might need to hire before rebuilding your home include:

  • Mold specialists: If your home previously had water damage and mold, a mold specialist will assess the property and may have to mitigate to ensure all the mold is gone before you start rebuilding.
  • Reconstruction specialist: A reconstruction specialist will inspect your home’s damage and estimate the cost of repairs. They might also have their own crew or can recommend a crew who can rebuild your house.
  • Landscaping specialists: A landscaping specialist can draw up plans to landscape your yard, fix fences, and install other features, like a pool.
  • Debris removal: If there is debris in your yard, you may have to pay a separate debris removal company to haul it away.

If you’re rebuilding your home on a tight timeline, you might need to pay more for expedited shipping and delivery of certain materials. Some contractors and specialists cam also charge more for their services if you need help right away. 

Deciding on dwelling coverage

Replacement Cost Value (RCV)

Your home’s replacement cost value (RCV) is the cost of rebuilding your house to the condition it was in before it was destroyed. RCV also applies to the cost of replacing lost or damaged personal items. Keep in mind that RCV is not the same as your home’s real estate value. RCV doesn’t account for property taxes, or the value of homes in your neighborhood.

Your home’s RCV is primarily based on the square footage and the cost of construction in your area. To calculate the approximate RCV of your home, multiply the square footage by the local cost of rebuilding per square foot. A contractor or appraiser can help you figure out the local rebuild costs if you are unsure.

There are other factors that contribute to your home’s replacement cost value. For instance, certain types of roofs and foundations are more expensive to rebuild. The same goes for the materials used on the exterior of the home, and any built-in appliances.

If you look at your home insurance policy, you might notice that you have extended replacement cost or guaranteed replacement cost coverage. An extended replacement cost policy will pay to rebuild your home to its original condition, even if the cost is greater than your dwelling coverage limit, up to a certain amount.

With guaranteed replacement cost coverage, your insurance company will pay to rebuild your home to its original condition, regardless of the construction cost, with no limit. Some home insurance policies also offer guaranteed replacement cost for personal property.

Actual Cash Value (ACV)

If you don’t have a Replacement Cost Value policy, you have an actual cash value (ACV) policy. Unlike RCV, an ACV policy factors your home’s deprecation into your payout. In other words, it won’t pay you to rebuild your home to its original condition. ACV policies are cheaper than RCV policies, but you end up with a much lower payout after a loss.

If you have an ACV policy, check to see if you have an inflation protection clause. This type of clause will impact your claim payout based on the current inflation rate in your area. Without an inflation protection clause, your policy will likely not cover the full cost of rebuilding your home, except in some cases if your home was recently built prior to loss.

It’s important to have adequate dwelling coverage in the event that you need to rebuild your home. If you think you need more coverage based on your home’s reconstruction value, contact your insurance company and arrange for an increased coverage amount.

The takeaway

  • If your home is destroyed by a covered peril, your insurance company will pay for it to be rebuilt based on the reconstruction value.
  • Rebuilding your home is much more expensive than just the cost of construction—temporary accommodations, hiring specialists and replacing lost personal items are a few of the additional aspects to consider.
  • After a claim, you’ll be paid out based on the type of policy you have—actual cash value or replacement cost value.
  • An ACV policy factors depreciation into your payout, whereas an RCV policy pays you to rebuild your home based on its original condition at current market value for labor and materials. 

Rebuilding your home after a covered loss is a significant financial consideration, especially when you factor in all the added costs. The good news is that your home insurance will likely cover the majority of the cost.

With an ACV policy, you’ll be reimbursed based on the original condition of your home, minus depreciation. An RCV, guaranteed RCV or extended RCV policy will give you a higher payout that is equal to the original value of the home at current value for labor and materials to replace.

Before you start rebuilding, it’s important to know your home’s reconstruction value, be aware of the costs associated with rebuilding a home, and make sure you have adequate dwelling coverage to protect your home from certain losses. If you think you’re entitled to more coverage based on the reconstruction value of your home, you can negotiate with your insurance company.

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