If your home has been destroyed and instead of rebuilding, you wish to buy a replacement home somewhere else. In some states, including California, the law protects your right to do so (Cal. Ins. Code. 2051.5). Many other states are approaching this issue on a case-by-case basis.

 The main thing to focus on is reaching an agreement with your insurance company on what it would theoretically cost if you did rebuild the exact same home that was destroyed. Generally speaking, that is what the insurer owes you. But remember, you MUST spend what it would have cost to rebuild if you expect to collect full replacement cost. 

Once you reach an agreement on that theoretical replacement cost of the original home, you have the basis for reaching a fair insurance settlement that will allow you to buy a new home instead of rebuilding.   If you choose to spend more than your insurance settlement on buying the replacement home, you can do so by adding in your own money.  You may have to negotiate with your insurer over land values at the old and new home site to complete the settlement and purchase.

This tip sheet will give you guidance on how to maximize your insurance benefits if you choose to replace, rather than rebuild your destroyed home.

What is Replacement Cost Value Coverage (RCV)?

Replacement Cost Value Coverage gives you the dollar amount it would cost to replace or repair your home with one of like kind and quality to what you lost.  No depreciation applied.

What is Actual Cash Value Coverage (ACV)?

Generally speaking, ACV Coverage gives you the Fair Market Value of your home on the day before the loss (what a willing buyer would have paid a willing seller).  Your policy may have a different definition.  Depreciation is applied.

What is Extended Replacement Cost Coverage (ERC)?

Extended Replacement Cost Coverage gives you extra coverage above your dwelling limit if you suffer a loss above that limit.  It’s usually provided through a “rider” or “endorsement” you paid extra for.  The most common ERC comes in amounts of 25, 50, 75 or 100% above your dwelling limit.  Be aware, however, that your personal property limits will not be increased over the stated value on the policy even if you have extended coverage. 

 When does the insurer pay ACV instead of full replacement cost?

Generally, the insurer pays ACV when an agreement has been reached on the repair/replacement cost of the insured home.  The insurer sets the ACV by applying a depreciation formula to that cost. 

When does the insurer pay full replacement cost?

Generally the insurer pays full RC when an agreement has been reached on the replacement cost of the insured home.  However, the money may get deposited into a supervised construction account and doled out via progress payments, or a temporary depreciation hold back may be applied until rebuilding is complete.  If you’re buying a replacement home, you should be able to collect full replacement cost as soon as you’ve given your insurer proof of the purchase and price.

Will I be able to get my full extended replacement costs if I buy instead of rebuilding?

Yes, theoretically. In California at least. According to the California Department of Insurance, you are entitled to the full benefit of all coverage extensions.  This view is confirmed in a legal memorandum issued by the Department in 2008 citing Conway v. Farmers Home Mutual Insurance Co., 26 Cal.App.4th 1185 (1994).  However, a 2011 California decision says: "an insured [is] required "repair, rebuild, or [replace]" in order to collect full replacement cost [citing CA Ins. Code sec. 2051.5]: "If the policy requires the insured to repair, rebuild, or replace the damaged property in order to collect the full replacement cost, the insurer shall pay the actual cash value of the damaged property, as defined in Section 2051, until the damaged property is repaired, rebuilt, or replaced. Once the property is repaired, rebuilt, or replaced, the insurer shall pay the difference between the actual cash value payment made and the full replacement cost reasonably paid to replace the damaged property, up to the limits stated in the policy." Minich v. Allstate Ins. Co, 193 Cal.App.4th 477 (2011). 

Can I buy a house for less money than my full extended cost replacement value and pocket the difference?

According to the Department of Insurance the answer is NO. Again. state-by-state approaches may differ. 

If I buy instead of rebuild, can insurers deduct from my replacement cost settlement an amount it determines to be the value of the land of my new home?

This is still an open question.   There are several arguments you can make to avoid having your insurer deduct the value of the land under the replacement home you’re buying: 

  1. If the policy doesn’t authorize a land value deduction, the insurer is not entitled to take one.
  2. Land values are subjective.  Why should the insurance company be entitled to its number?
  3. If you buy a new home plus the land it sits on for the same amount you’d have to spend to rebuild your own home, it stands to reason that you would be buying a home that is lesser in value than the costs of replacing your own home.
  4. The simplest approach is for your insurer to pay you the full amount, up to your policy limits including all extensions that you would have to spend to rebuild your destroyed home.  This assumes that you have provided a reasonable scope of loss as well as proof of your intent to actually buy a different home.

Do I need to present the Insurance Company with a scope that compares what I lost to what I intend to buy?

It is probably a good idea to obtain a detailed scope of loss for the house you lost to be used as a cost comparison for the house you intend to buy.


United Policyholders thanks Karen Reimus, Esq., Board member Alice Wolfson, Esq., and Staff Attorney Dan Wade, Esq. for assistance with this publication.