Does homeowners insurance cover a total loss to your house?

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Home insurance covers your home for its calculated replacement cost, represented by the dwelling coverage amount on your policy. This is meant to rebuild your home from the ground up, and as long as you have enough coverage, it will cover a total loss.

Home insurance covers the total loss of your home as long as a covered peril caused the damage. You’ll be responsible for your deductible.

If your home is a total loss, you’ve got a lot to deal with. Make the insurance process easier by understanding how your coverage works.

Key Takeaways

Home insurance covers your home up to the dwelling coverage limit, which is the calculated replacement cost of the house.
If your home would cost more to repair than to completely rebuild, it is declared a total loss.
In states with valued policy laws, the insurance company must pay out the full value of the policy limits in the event of a total loss.

When is a home considered a total loss?

A home is considered a total loss if the damage is so severe that it would cost more than its value to repair. For example, if your home is valued at $200,000, but it would cost $350,000 to repair the damage, it is a total loss. If the home is too damaged to repair within its valuation, you must rebuild or buy a new house.

In some situations, a total loss is obvious — for example, if a home burns down and there’s nothing left to repair. Ultimately, your insurance adjuster will decide whether the damage meets the criteria for a total loss.

What happens if your home is a total loss?

If your homeowners insurance company determines that your home is a total loss, it will pay out up to the limit of your dwelling coverage — typically the replacement cost of your home. That payout can be used to rebuild on the same property or, depending on your policy and insurer, to buy a new home elsewhere.

Keep in mind that your insurer won’t pay more than your policy limits, even if construction costs have increased, unless you have additional endorsements like extended or guaranteed replacement cost coverage.

In addition to the dwelling payout, your policy may include additional living expenses (ALE), such as hotel stays, meals, storage costs and related expenses while your home is being rebuilt or replaced. You’ll work closely with your insurance adjuster throughout the process to finalize the claim and determine how the funds will be distributed.

State laws that can impact your insurance check

Some states have valued policy laws that require insurers to pay out the full dwelling coverage amount in the event of a total loss, regardless of the actual cost to rebuild. These laws are designed to simplify the claims process and protect policyholders from underpayment, but they only apply under specific conditions and typically to losses caused by certain perils, such as fire.

Important caveat: Valued policy laws vary widely by state and may only apply when a covered peril causes the total loss and the property’s insured value was agreed upon in advance. Not all states have these laws, and there are exceptions even in states that do.

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How replacement cost coverage works with a total loss

Most homeowners insurance policies are replacement cost, which means that the dwelling coverage amount is based on what it would cost to rebuild your home from the ground up using similar materials and workmanship, at today’s prices.

Insurers estimate this amount using details about your home’s construction, such as square footage, materials, and features. This value is typically updated each year to account for inflation and rising construction costs, but even so, underinsuring your home is still a risk.

Unless your policy includes an endorsement like extended or guaranteed replacement cost coverage, you won’t receive more than your dwelling limit, even if rebuilding costs more than expected.

How to make sure your coverage keeps up with rebuilding costs

Many homeowners don’t realize they’re underinsured until it’s too late. If the cost to rebuild your home exceeds your coverage limits, you may have to dip into savings, take on debt to fill the gap, or scale back your rebuilding plans.

Inflation, labor shortages, and rising material costs can quickly drive up construction prices. That’s why it’s critical to review and update your dwelling coverage regularly. You may also want to consider extended or guaranteed replacement cost coverage to provide a cushion in case rebuilding costs more than expected. The right coverage can be the difference between fully recovering and facing long-term financial strain.

Homeowners insurance add-ons that help cover the full cost of rebuilding

While homeowners insurance only pays up to the policy’s replacement costs, there is a way to get the reconstruction of your home fully covered. You can add an extended replacement cost or guaranteed replacement cost endorsement to your policy.

Extended replacement cost coverage adds a specific percentage on top of the calculated amount, usually an additional 25% or 50%.

Guaranteed replacement costs ensure that your home will be replaced regardless of how much the cost exceeds the limits.

What to expect from your total loss insurance payout

If your home is declared a total loss, your insurance company will issue a check for the amount of your dwelling coverage minus your deductible. This payout may also include money for personal belongings lost or damaged in the event.

If you have a mortgage, the insurance check will be made out to both you and your lender. This is because your lender has a financial stake in the property and wants to ensure the home is rebuilt or repaired to protect their investment. In most cases, you’ll need to send the check to the lender for endorsement before you can access the funds.

Typically, the lender won’t release the full amount immediately. Instead, they may hold some or all of the money in an escrow account and disburse it in stages as work on the home progresses. This process helps ensure that the repairs are completed and the property is restored to its original condition or better. While it can take some coordination, this is a standard part of the claims process when a mortgage is involved.

What is additional living expenses (ALE) coverage and how does it help?

If your home becomes uninhabitable after a covered disaster, additional living expenses (ALE) coverage can be a financial lifesaver. ALE helps pay for temporary housing, meals, and other costs you wouldn’t normally have if you lived at home, such as laundry services, pet boarding or transportation.

Most standard homeowners insurance policies include ALE coverage, but limits can vary. It’s important to know what your policy covers so you’re not caught off guard during the recovery period. Keep receipts and track all expenses — your insurer will typically reimburse you for reasonable costs that exceed your normal living expenses.

Do you have to rebuild after a total loss?

You don’t have to rebuild, but you will have to pay off your mortgage. Remember that you still owe your mortgage company regardless of the loss of the home.

While it may be possible to sell the property without any repairs, you may not be left with enough to buy a new home after paying off the mortgage, since land with a destroyed home won’t be as valuable. Consider your options carefully before you decide not to rebuild.

Nupur Gambhir

Managing Editor

Nupur Gambhir is an insurance expert and managing editor of Insure.com. She specializes in life and health insurance content, and has experience as a marketing consultant.