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Personal Risk Management

Insurance for the California Wildfires

Jack Hungelmann | November 1, 2007

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Forest fire close to a neighborhood

The big insurance issue in the news recently is the wildfires raging in California, having destroyed thousands of homes already. CNN talked to me about some of the insurance issues.

Although I did not appear on their program, here are the questions I suspect viewers (and readers) would like answers for.

What is the single most important thing for a homeowner to know if his home has been destroyed?

Under no circumstances let the adjuster for the insurance company do what they are trained to do: write an estimate and give you a check. Nor should you have your contractor write a construction estimate either. I guarantee you will have a fight on your hands. Once either one of them has taken a stand, it is extremely difficult to get them to move off that stand and compromise.

Wildfires are like hurricanes. Thousands of homes must be rebuilt at the same time when there is not enough building materials or contractors to go around. This, of course, leads to skyrocketing price increases in labor and materials, making the replacement cost of a home destroyed by the wildfire 50 percent or greater than what it would've been before the fires. Assuming you have enough structural coverage, you are entitled to receive the cost to rebuild your home at today's materials and labor costs. You are entitled to insist that the contractor and the insurance adjuster work together to reach an agreed price (exactly the same process you go through when you bring your damaged car to a body shop).

  • Step one: Choose your builder.
  • Step two: Give the insurance adjuster your builder's name and cell phone number.
  • Step three: Give your builder the adjuster's name, cell phone number, and claim number. Require them to contact each other and meet at your home site and together write a construction cost estimate. This way you won't get caught in the middle. They will try repeatedly to bring you in but just keep insisting they work it out. When you finally do get your check, it will be for an amount that will completely rebuild what you had at today's prices.

How much will the policy pay to rebuild?

It will pay the cost to rebuild what you had up to the insured amount if you insured your home for 100 percent of its estimated replacement cost as computed by your agent. Then, if you have an "extended replacement cost" endorsement, it will pay an additional 25 percent, 50 percent, or more of that insured amount, depending on with which company you are insured. 1 Finally, if your home is a little older and building construction laws have tightened (such as making your home more earthquake resistant), thereby dramatically increasing the replacement costs, it will typically pay another 10 percent and possibly up to 100 percent additional for those costs, depending on whether you purchased "supplemental building ordinance" coverage.

For example, if you insured your home for its estimated replacement cost of $500,000, but because of the cost increases following a disaster like a wildfire, the replacement cost is $800,000 for what you had, and an additional $200,000 for added costs from building ordinances, you need $1 million to rebuild. Assume you had purchased the optional extended replacement cost endorsement of 150 percent and an optional ordinance endorsement for 125 percent, you could collect up to an additional $375,000 for a grand total of $875,000. Still short of what you needed, but considerably better than the $500,000 original coverage.

What about the home contents?

You will be required to produce an inventory of what was destroyed in the fire. If you kept photos off-site, your job will be considerably easier. Your inventory form should include the description of the item, the age, the life expectancy, the replacement cost new of each item, including sales tax (often overlooked), the store name, salesman's name, and phone number (so the adjuster can verify any values he questions). If the price comes from the Internet, list the site address. Divide the average age by the average life expectancy to determine an average percentage of depreciation to be deducted from each item. IMPORTANT: Remember the adjuster is swamped with wildfire claims. Your proactive work has just made his life tons easier. You will earn yourself a much better settlement and get paid weeks faster and, best of all, with minimal aggravation. Your initial settlement will be based on the depreciated value of your belongings.

Then, if you opted for replacement cost coverage, as most people do, the adjuster will pay you the withheld depreciation difference once you actually do replace the item with something comparable. You can even upgrade what you had by just paying the price difference.

What about living expenses for the months until my home is rebuilt?

Your policy has a built-in coverage that pays you your additional living expenses. You won't ever be unhappy if you remember the word "additional." So your monthly rent and all related expenses of a comparable furnished living space are covered, less all expenses that do not continue from your destroyed home—phone, trash, mortgage payment, other utilities, and even gasoline costs if the rental is further from work. If it is an additional expense, it is yours. Typically, coverage lasts up to 12 months if necessary. The maximum payable is usually 20 percent of the insurance limit on your home.

Note: This coverage applies even if there is no damage to your home but you cannot return due to government order. You are entitled to all the same additional expense coverage as if your home burnt to the ground. The coverage in this case ends, however, when the government permits you to return to your home.

The objective of every claim should be to collect all that you deserve without prolonged delays and with a minimal amount of hassle. Accomplishing that following a catastrophic event like these wildfires is difficult indeed because everything these homeowners need, they need simultaneously (including claims adjusters). These are a few tips that, hopefully, will make their claim settlement an easier, more positive experience and help them collect the full value of their claim.

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1 Policy analysis in this article is based on standard policies. As always, you should confirm with your agent what your individual policy covers.