On October 8, 2017, a fire began in Calistoga, California, that would kill 43 people and displace 100,000 others. Because of the weather conditions, the fire moved fast. The following morning, I remember hearing that the fire had jumped the 101 freeway and engulfed the Fountaingrove Inn. By the time my first meeting of the day had ended, the fire had moved two miles and burned our Santa Rosa office to the ground. The Northern California wildfires would blaze until the end of October, burn down more than 4,000 homes, and destroy at least as many other structures. The tragedy would not end there. As many families began to piece their lives back together, they discovered that their homeowners policies were not what they expected.
A homeowners policy provides a broad package of protections but with many options, restrictions, limitations, and exclusions. Coverage includes real property (homes, outbuildings, fences, walls, trees, etc.) as well as personal property (furniture, equipment, collections, fine art, jewelry, silverware, etc.); medical payments if you injure someone or if someone gets hurt on your property; and personal liability, including legal defense for lawsuits arising from bodily injury or property damage you cause to others.
What the Northern California wildfires exposed on an incredible scale were gaps in the coverage of real property. With this valuable lesson in mind, it is worth reviewing your homeowners policy and examining specific parts of it.
Loss of Use Coverage
When a home is damaged or destroyed, loss of use coverage is intended to cover the expenses in excess of what you would normally spend. For example, you may have to stay in a hotel or rent an apartment while your home is being rebuilt. Loss of use coverage will cover that cost. It will also cover things like an increase in food expenditures. If you dine out more often because you don’t have a kitchen at your disposal, this excess cost is covered. Some loss of use coverage, however, ends after a set amount of time. For those whose homes were damaged in the Santa Rosa fire, a six-month loss of use allowance was helpful but far from sufficient. It has already been eight months since the fire, and for many families rebuilding hasn’t even begun.
Ordinance and Law
When a city or town updates building codes, those codes apply to new constructions only. The codes don’t require homeowners to make those upgrades to houses that have already been built. But when someone remodels or rebuilds a home, the city can insist that the new codes be met. This often makes remodeling or rebuilding more expensive. Ordinance and law can easily drive rebuilding costs up by 20%. Make sure this protection is included in your homeowners policy, especially if you have an older home.
Oddly, most insurers make you responsible for setting the correct limits on the cost to rebuild your home. Understandably, homeowners often agree to low coverage limits to reduce premiums. That, however, is a mistake. Taking some time to understand reconstruction costs will greatly improve the value of your homeowners policy. A residential contractor, for example, can estimate the cost per square foot to rebuild. You can also ask your broker to use Marshall & Swift software to get the same information. An inflation guard should be included to offset the rise in labor and material costs.
Many insurers offer what’s known as extended replacement cost coverage for rebuilding your home. This is especially helpful in instances when the cost to rebuild exceeds a policy’s limits. The higher the percentage of the extension coverage, the safer you will be. When many homes have been damaged at the same time, such as in a large fire, the surge in demand for rebuilding can dramatically increase the costs of materials, labor, and architecture and engineering work. Extended replacement cost coverage will cover those cost increases.
Homeowners insurance isn’t something you think about or need every day. It’s removed from your normal life. Most consumers will only experience the benefits of homeowners insurance a few times throughout their lives. On the other hand, paying the premiums for that homeowners policy is a recurring experience, and it’s not usually a pleasant one. Because we seldom see the benefit of this insurance, we can quickly get annoyed about paying the premiums. This isn’t lost on insurance companies who focus marketing dollars on quirky television ads with the simple message that they will save you money. There is a seemingly endless cascade of insurance commercials with such slogans as “name your own price” or “you could save hundreds” or “15 minutes could save you 15% or more.”
But focusing just on the cost for a homeowners policy is a mistake, especially if you reside in California. Here, homes cost well above the national average and factor importantly into many retirement plans. While Californians typically pay more for a comprehensive homeowners policy, it makes a lot of sense for them to do so. For many Californians, the right homeowners policy doesn’t just protect their home, it protects an essential part of their net worth and an asset required to realize their retirement goals.
Note: As fee-only financial planners at Bell Investment Advisors, we do not sell homeowners insurance or any other kind of insurance. As fiduciaries, we do not accept commissions, kickbacks, or any form of compensation for our recommendations. While we do not sell homeowners insurance, we do advocate that our clients have it.
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