Accessing depreciation without rebuilding travelaround42 asked 2 years ago
Accessing depreciation without rebuilding

I had a house fire (caused by lightning) at the end of November ’22. My insurance company has been easy to work with. They are responsive and have kept the process moving forward. No complaints there. I am trying to understand my options, but my local agent has refused to walk through my policy with me. I’m hoping to find help here.

The home is an 80s design – basically two circles on two different grades connected by a walkway. One circle was completely destroyed. The other circle suffered smoke damage to the top floor, but the bottom floor is okay. Insurance’s estimate is a complete teardown of the destroyed circle, and a rebuild (leaving the studs) of the other circle. Due to the complexity of the build, this has already maxed the policy and it won’t be enough to actually cover the repairs. It would have been plenty on a “normal” home design. Lesson learned. The estimate will, however, cover paying off the mortgage and a portion of the teardown. If I choose to tear down the structure completely, is there any way to tap into the depreciated funds? I’m sure it’s policy dependent, but in general are there ways to access depreciation without replacing?

I have replacement cost for the dwelling. According to my policy, “If the cost to repair or replace is $1,000 or more, we will pay the difference between actual cash value and replacement cost only when the damaged or destroyed property is repaired or replaced.”

Thanks in advance for any advice.

1 Answers
Judith Vickers Judith Vickers Expert answered 2 years ago
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I am so sorry you had a house fire. It is so nice to hear that your insurance carrier has been easy to work with and responsive. Based on your comments relating to replacement cost coverage for your dwelling, I am going to assume that you have a HO-3 Policy.

In this case there is the edict that in order to receive any additional payments from your fire claim on a replacement cost basis, you must complete the actual repair or replacement of the damaged part of the property within two years after the date of loss.

Things to consider: Is your interest rate on the mortgage very low? Perhaps you could keep the mortgage, work with the loss drafts department and begin repairs while obtaining a smaller loan to bridge the gap of coverage and repair the house. Once completed, you may be able to sell the house at a profit. If you pay off a loan which is at a lower rate than currently offered, you may have difficulty obtaining a comparative rate in this market.