When buildings are damaged, insurance benefits can be paid in a variety of different ways. This depends on the extent of the damage only, and not on the economic losses. If your building is a “total loss” – it is completely destroyed –the insurance company is obligated to pay the fair market value of the building or the policy limits, whichever is less. If it is a “partial loss” – some of the structure remains – the insurance company must pay the estimated cost to repair minus depreciation. These categorizations are often abused where it will save the insurance company money.
Many insurance companies follow the unlawful practice of declaring a building a total loss when the estimated cost to repair exceeds its fair market value. For example, a fire can destroy half of a house, but an insurance company might say it is a total loss because the cost to repair exceeds the fair market value. That is illegal, but it results in the company having to pay less, as the fair market value of buildings can often just a small percentage of the cost to repair them. This underpayment problem is a particularly significant problem in areas where the property values are lower, or with older and historic buildings. Thus, it is important to apply careful scrutiny any time the insurer deems your loss “total,” even if only a small portion of the property remains standing.