If your home is damaged by a fire, a flood or another disaster, you may be relieved to know it wasn’t completely 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 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 file a claim, only to discover gaps in the perils covered or the amount of money the insurance company will pay.

In addition to knowing the perils your homeowners insurance covers, you should understand:

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 may be covered (always check the details).

If there is a gap in coverage, additional insurance for earthquakes and floods is available. Work with your broker to see what coverage gaps you may have.

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, 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 it’s a great way to 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 you don’t update your policy regularly, you may find you have underinsured your property. 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. 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 broker 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? 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 broker about these nuances.

Debris removal: The typical homeowners insurance policy has a percentage amount of coverage for debris removal, say 25% of the amount paid for the damage to your home. That is usually sufficient to take away the trash. But if you need any specialty treatment, such as removal of asbestos or other hazardous materials, you might encounter removal 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 broker about possible solutions to cover these expenses, especially for debris that doesn’t involve direct damage to your structures.

Additional living expenses: If your home is damaged so badly you can’t live in it, a stipulation in your homeowners insurance 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 submit receipts to your insurer. Your insurer will then 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 damaged. Talk to your broker about this scenario. If your policy doesn’t cover rebuilding to code, you can add this coverage. It’s 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, imagine a storm damages your house. The storm appears to have damaged only your garage and laundry room. But a closer inspection might reveal:

This is where the adjuster plays an important role.

If you suffer such a large loss, the insurance adjuster will inspect your property and give you and your insurer 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. In that case, the home would have to be 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 broker to fully understand what your policy covers and if you need to close certain gaps. That way, you will be better prepared and better insured should you
suffer a large loss.

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