How should homeowners buy fire insurance?

A tutorial that can save you millions of dollars

In October 2007, homeowners throughout San Diego County suffered devastating losses to their homes. Multiple fires were burning consecutively in all regions of the county and people watched helplessly as firefighters struggled to extinguish the fires.

Once residents were cleared to return to their homes, they discovered the extent of the damage. Homeowners immediately filed claims with their insurance companies and began the lengthy claims process. As early as March 2008, insurers claimed that 97% of all fire claims for October 2007 had been settled. The reality is that many homeowners have not settled their insurance claims.

Most troubling is that nearly two years after the fires, homeowners’ losses continue to mount.

The main reason for the increased loss is due to the widespread problem of homeowners being underinsured. The survivors of the fire have learned a very important lesson. Relying on your insurance agent or insurance company to set your policy limits can be a very damaging act. Unfortunately, it is an act that only hurts the homeowner, with no repercussions for the insurance agent or insurance company. If it is later determined that the insurance limits are not enough to rebuild your damaged or destroyed home, what steps can the owner take?

1) You need to know exactly how much you are underinsured by
A. Get an estimate from a licensed contractor to rebuild the damaged home
b. Have a separate Item Scope of Loss prepared to use as the basis for your claim.
2) Once it has been determined by how much the property is underinsured, the insurance company can be asked to reconsider the limits it has set. In some cases, the insurance company will try to amend the policy. This is a slow process that will require the insured to complete a lengthy questionnaire and return it to the insurer. Regardless of how you answer the questionnaire, the insurer will inevitably state that the responsibility for determining the appropriate levels of insurance rests with the insured. It is unusual for the insurer to accept liability and increase the limits.
3) The owner can file a Request for Assistance (RFA) with the California Department of Insurance. Instructions and the form for this can be obtained from the Department’s website at: http://www.insurance.ca.gov.

It has been my experience that many homeowners have not reached a favorable outcome to the action steps outlined above. So how to prevent this from happening in the future?

Be sure to purchase a replacement cost (RC) policy. A Replacement Cost policy will cover the full amount needed to rebuild your property, up to the limits of the policy. However, the insurance company will only pay you the actual cash value (ACV) of the property until the repairs are completed or the property is replaced. Some insurance companies calculate ACV by determining the RC amount and then subtracting depreciation. However, the ACV should be calculated as the fair market value (FMV) of the property. This is very important when valuing personal property. Insurers like to rely on the age of an item to determine the amount of depreciation. The problem with this methodology is that it fails when the value of an item increases over time. Likewise, how do you deal with a 20-year-old rug that’s still like new? In the opinion of the insurers, I owe them money! I suggest depreciation be based on the remaining life expectancy of the property.

First: Insurers claim that it is the homeowner’s responsibility to determine the appropriate levels of insurance for their property. The agent or broker will not know your property as well as you do. Accept the responsibility of properly insuring your home. If you do not purchase the appropriate amounts of coverage, the loss will be yours.

When shopping for coverage, be sure to provide the agent/broker with all relevant information. For example: Do you have a home office? Do you have a business from your home? Do you have any special interests or hobbies that include special equipment? Do you have expensive collectibles or antiques? Riders and endorsements can be added to your policy to ensure you have enough coverage to insure those items.

Some of the most commonly overlooked areas are:

Additional Structures: Additional structures include outbuildings, sheds, walls, fences, decks, driveways, pools, and other structures not attached to the residential dwelling. Be sure to describe your additional structures to your broker. Additional structures are normally insured for 10% of the Coverage A limits. Coverage A insures your Home. This amount can be increased if necessary.

Landscaping – Landscaping is generally not insured as a separate category, but is included in the policy as Additional Coverage. This coverage insures trees, plants, and shrubs up to $500 each. Total limits are generally capped at 5% of Coverage A. For many people who live in rural areas or have large parcels, this will not be adequate to replace all their trees, plants and shrubs. Be sure to ask for increased limits if you don’t think 5% of your Coverage A limits will be enough.

Personal Property: Many homeowners have hobbies or interests that lead them to create collections of various items. Some people collect figurines, wine, vintage watches, stamps, guns, art, antiques, dolls, sports memorabilia, well, you get the idea. Most homeowners policies have limits on how much the policy will pay for these types of items. The good news is that there is always additional insurance you can purchase to protect yourself from loss in these areas. Ask your broker/agent about endorsements that may add additional coverages for those items. Most of the endorsements I’ve seen provide much broader coverage for that personal property than is contained in the standard homeowners policy. For example, jewelry riders provide worldwide coverage for your jewelry that is broader than what is offered in a standard homeowners policy.

Liability Coverage: Section II of your standard homeowners policy insures you for damages for which the insured is legally responsible. This means that if someone is hurt while visiting her property, they could sue you for the bodily injury or property damage they suffer. This coverage also provides your legal defense for lawsuits against you.

Additional liability insurance can be purchased through an Umbrella Policy. A blanket policy will increase your limits on all of your liability coverages, including your auto policy, boat owner’s policy, or any other policy you may have that insures property. General policies are very inexpensive for the amount of additional insurance you receive.

When setting limits for your Home, the following steps will help you determine the appropriate limits.

1) Talk to a licensed contractor for current construction costs. Ask what the average cost per square foot is to rebuild your home. Keep in mind that if you have a partial loss, it costs more to repair your home than it does to build new construction.
2) Consult a real estate appraisal or speak with a real estate appraiser to find out what your Replacement Cost Values ​​are calculated at.

Other factors that affect your coverages are:

Extended Replacement Cost Riders – Does the insurer offer to increase your limits with an Extended Replacement Cost Rider? This is the new way of trying to increase your limits. The old way was to sell Guaranteed Replacement Cost Policies. The problem with those policies was that the insurers found it too difficult to limit their exposure, so they switched to extended replacement cost endorsements.

One of the problems this coverage creates for the homeowner is being able to understand the limits of their coverage. You see, these endorsements generally increase your limits on all coverages. In effect, the limits will float up or increase the limits on your other categories, such as Additional Structures, Personal Property, Loss of Use, Additional Living Expenses, etc.

Another problem that this coverage creates for the homeowner is the additional conditions that must be met for the coverage to apply. Therefore, you not only have to meet the regular policy conditions, but you also have the additional policy conditions for Extended Replacement Coverage. How does this help the owner? It seems to me that this only benefits the insurer. Wouldn’t it just have been easier to increase the established housing limits? You may be a bit skeptical, but I deal with real people on real claims and this is my experience. It is rare that an insurance company will make a change that in any way benefits the insured. We often find out later that these changes have only helped the insurer.

Square footage discrepancies: Some insurers are turning to Tax Assessors’ records to determine the amount of square footage the insured property had. Guess who this creates a problem for? Obviously the owner now has one more thing to deal with. It is rare that the records of the Office of Tax Consultants reflect exactly the same amount of square footage that is listed on the Declarations Page of the insurance policy. What can you do to address this discrepancy?

1) Check the insurance policy first. Your policy covers your property as described on the declarations page. As long as your property is described correctly, with the correct amount of square footage, then you have paid the insurance for the indicated amount of square footage.
2) Most Tax Assessor Records only list the square footage of your home’s deliverable area. This normally does not include a garage. So one reason for a discrepancy could be the garage. Your insurance policy must include the total square footage of your home and should not be limited to deliverable square footage.
3) Ask the insurer in writing to explain how it would resolve a discrepancy if the Tax Assessor’s Records reflected more square footage than what is listed on your Declarations Page. Would they increase your limits or pay more than what was stated in your policy? I really doubt it.

Insurance Requirements Under a Mortgage or Deed of Trust: Another area of ​​importance concerns the requirements under a mortgage or deed of trust. The homeowner is known as the Borrower and has certain obligations and requirements to maintain appropriate levels of replacement cost insurance.

Typically, the lender will require replacement cost limits up to the amount of the unpaid principal balance (UPB). A word of caution: Don’t rely solely on the minimum requirements your mortgage company requires. Most likely it will not be enough.