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Regina Said:

If your house burns down and its mortgaged, what does your house insurance cover?

We Answered:

Assuming the policy is a "replacement cost" policy, most insurance policies cover the lesser of:

1) Cost to repair/replace the house
or
2) The "Coverage A" policy limit. (Building Coverage)

When a person purchases a homeowners policy, they purchase a policy for a certain dollar amount. (i.e. someone buys a brand new $250,000 house, the home is usually covered for $250,000 - $275,000 depending on the area) This dollar amount is called the replacement cost. Don't get this confused with "market value." Replacement cost and market value are two different things. Market value is the value of the home whereas replacement cost is the cost it would take to rebuild the home brand new.

Let's use your example.... A person owns a house (they have a mortgage on the home as well). They bought the house for $200,000 with 100% financing. At the time they bought the house, they spoke with their agent and the agent determined the house has a replacement cost of $215,000. A year later the house burns to the ground and there is nothing left.

At the time the house burned to the ground, they owed $190,000 on the mortgage.

After an adjuster visits the home, the insurance company determines it will cost $225,000 to rebuild the home from ground up due to extensive foundation damage. The insurance company decides to "total" the house and write a check for the "Dwelling Coverage Policy Limit." Since the home was written with a replacement cost of $215,000, the insurance company writes a check payable to the bank and you for $215,000. The bank takes $190,000 and you get $25,000.

In other words, it all depends on the mortgage amount and how much coverage is carried under the homeowners policy. The dwelling coverage limit is the maximum the insurance company will have to pay in the event of a loss (assuming there are no other endorsements to the policy). Hope this helps.