Building insurance and coverage

Hello,

I was just wondering what figure most of you use for the insurance on your IPs - the purchase price or the cost of rebuilding? I have come across a calculator on many insurers websites that calculates the costs of rebuilding but I was under the impression that most just used the purchase price of the property.

For us, the purchase cost is about half the rebuild cost they are claiming, so not sure which one I should use. Is this just some money making trick by the insurance companies to inflate their premiums?

Thanks

cimbom said:

For us, the purchase cost is about half the rebuild cost they are claiming, so not sure which one I should use. Is this just some money making trick by the insurance companies to inflate their premiums?

Thanks

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Well, let's say you buy insurance for the purchase cost and the place burns down. So insurance will give you back enough money to build half a house. Is that good enough for you?

Especially if it's an older property, most of your purchase price might be the land value, while building insurance is to provide enough money to build a new house. If your property was brand new now, how much would the purchase price be? My guess is much higher than your purchase price.

As alexlee says, your purchase price is irrelevant. You want to ensure that, in the event of a total loss, the house can be replaced, so of course it's the cost of rebuilding that's important.

Unless its cheaper to buy a nicer house down the road than it is to rebuild. In which case your replacement value is the cost of the house down the road. And you are left with what is effectively a free block of land.

boomtown said:

Unless its cheaper to buy a nicer house down the road than it is to rebuild. In which case your replacement value is the cost of the house down the road. And you are left with what is effectively a free block of land.

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Never a good idea to under-insure in case you get a partial damage. Say the house would cost $400K to re-build, but you only paid $200K. (Because the land's worth $300K and you paid $500K.) So you decide to insure for $200K.

In the case of a total loss, yes, you get $200K, and you have your vacant block of land, worth what you paid for it.

But what about if half the house is destroyed by fire?

It would cost $200K to repair the destroyed half, but the insurer isn't going to pay $200K to repair only half the house, because that's the total coverage - they'll figure out that you were only 50% insured, and will only pay out $100K.

Insurers also aren't obliged to pay out cash; they may insist that the $100K is embargoed to pay for repairs, and thus no money will be paid out until you've come up with the other $100K to finish the job.

If they're real *******s, they'll argue that you've deliberately under-insured and that this voids your policy (it is usually a violation of your declaration and duty of disclosure to under-insure), and you'll have no coverage.

At best, if you under-insure, you end up with a worthless half-house that you can't afford to repair properly, and a $300K block of land that you've paid $400K for, plus you have to pay to demolish the rest of the house (or throw in another $100K to do the repairs).

Thanks. That makes sense. Any recs for good building insurance? I have read good things about Terri Scheer and their landlord insurance is good but the building insurance seems a bit iffy. I would like to have flood coverage as well but there's so many options. Thoughts?

Good points Perp.