How Does a Home Insurance Company Determine a Total Loss?

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When the price to repair a home costs more than the home is worth, it is considered a total loss. Here are the six factors your home insurance company uses to make that determination.

1. Type of total loss

When an insurance company is determining if a home is a total loss, it looks primarily at two types of loss. The first is actual loss. Actual loss is when everything is destroyed. An example of this would be a home lost to a fire, which typically equates to the house and all its contents being destroyed. The second type of loss is constructive loss. This is when a home is not completely destroyed, but the cost to repair it would exceed its value. In either case, the insurance company is only liable up to the total amount insured.

2. Extensive personal property loss

Part of determining if a home is a total loss is taking into account all personal property losses. If combining the cost to repair your house and replace your personal property adds up to more than the value of your home and its contents, your insurance company may opt to pay out for both.

3. Shortfalls

If your insurance company comes to the determination that your home is a total loss, in most cases you do have the option to pay the difference between what your insurance company will reimburse and what it will cost to repair or rebuild your house. For example, if it will cost $200,000 to rebuild your home, but you are only covered for $150,000, then you have the option to pay the shortfall of the additional $50,000 to repair or rebuild, depending on the damage done.

4. State regulations

Some states do not require repair costs to equal or exceed the actual cash value of a home for a total loss determination. For example, if the cost to repair your home exceeds 90% of the actual cash value of your house, an insurance company may still be allowed to declare a total loss and pay out the insured amount. If you are unclear on this, reach out to local agencies for assistance.

5. Disputes

Your insurance company will reach out to estimators, insurance adjusters, contractors, engineers, and other construction experts to determine the cost to repair or rebuild your home. It will take this information, along with other data and documentation of the damage, and use it to determine if your home is a total loss. If you disagree with their determination, you may have the right to dispute the claim and ask for a second assessment. However, depending on your policy and the laws of your state, you may have to pay for the reassessment.

6. Review your policy

Make sure to take an inventory of your belongings every year and review your policy to ensure you have adequate coverage in the case of a total loss insurance determination. People often underestimate what it would cost to restore their home and all their personal property. Consider replacement insurance, if it is offered. Unfortunately, when someone realizes they are underinsured, it is often too late.
The loss of a home involves much more than loss of property. A house can hold an abundance of irreplaceable memories. It can be hard to hear a home insurance company determine a home is a total loss, but unfortunately it can happen. Making sure you are adequately insured will provide some peace of mind.

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