We looked at an example, the other day:
Acquisition
Purchase Price: $1,300,000.00
Mortgage: $800,000.00
Fire Insurance: $500,000.00
House Value $500,000.00
At the Time of the Fire with Co-insurance clause: included
Value of Property: $1,500,000.00
Mortgage: $800,000.00
Fire Insurance: $500,000.00
House Value $700,000.00
Reduced Payout: $357,143.00
Shorthall: $342,857.00
At the Time of the Fire with Replacement Cost endorsement clause: included
Value of Property: $1,500,000.00
Mortgage: $800,000.00
Fire Insurance: $700,000.00
House Value $700,000.00
Payout: $700,000.00
Shortfall: none
Mortgagee Election to Receive Insurance Proceeds with Co-insurance Clause
Value of Property: $1,500,000.00
Mortgage: $800,000.00
Fire Insurance: $500,000.00
House Value $700,000.00
Reduced Payout: $357,143.00
Shortfall: $342,857.00
Reduced Mortgage: $442,857.00
Mortgagee Election to Receive Insurance Proceeds with Replacement Endorsement
Value of Property: $1,500,000.00
Mortgage: $800,000.00
Fire Insurance: $700,000.00
House Value $700,000.00
Payout: $700,000.00
Shortfall: none
Reduced Mortgage: $100,000.00
Implications for Homeowner
Basically, there is not enough money to rebuild if the mortgagee steps forward and wants the insurance proceeds. The homeowner will have to refinance in order to rebuild.
The preferred route for insurance is to ensure that the policy contains a “replacement cost endorsement” and avoid the “co-insurance clause” at all costs. However, you probably guessed which policy is cheaper! That’s fine as long as you never have a claim.
Failure to Rebuild
This is fairly simple:
- There was no payout from the insurer (arson, fraud, vacant property),
- The policy included a co-insurance clause,
- The mortgagee elected to have the mortgage paid down.
Brian Madigan LL.B., Broker