Dear Dr. Don,
I have a mortgage of $400,000. The cost to rebuild is around $250,000. The first time I refinanced, the mortgage company required the minimum replacement cost on the homeowners policy to be $350,000.

If my house burned down, what would the insurance company pay — the $250,000 or the $350,000? If it’s the former, can the mortgage company hold me to a higher replacement cost if the insurance company won’t pay that amount?
— Ken Conundrum

Dear Ken,
The insurance company will pay no more than the replacement cost of the loss. This is the amount it will cost to rebuild the property if it is totally destroyed.

If you are convinced the replacement cost is less than $350,000, you need to establish how you determined this estimate and discuss the matter with your lender. The lender may accept a lesser amount of coverage.

If it will not do so, you may have to carry more coverage than you really need. The insurer may or may not allow this amount of coverage, as over-insuring a customer can lead to intentional losses.

Replacement cost has little to do with the mortgage amount, because you are also buying the land. If the house was destroyed, you would still have the land, which may have a significant value. The $400,000 mortgage loan amount includes what you owe to the lender and the amount you would need to pay the lender to satisfy your obligations.

Thanks to Burton T. Beam Jr., a retired insurance professor who taught at The American College in Bryn Mawr, Pa., for his help in framing this reply.

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