State Insurance Commissioner Steve Poizners says people should avoid being burned twice-first by fire, then by trying to recover their losses. This is the fourth story in a series on fires.
By Vicky Shere / Special to The Malibu Times
Although it’s more fun to plan your summer vacation, financial planning now could slash your wildfire losses the way an escape plan could save your life.
With above-normal fire potential this year, California Insurance Commissioner Steve Poizner recently urged residents to proactively prepare for disaster by conducting a home inventory and updating their insurance policies as soon as possible.
“Don’t get burned twice-first by fire, then by trying to recover your losses,” said Commissioner Poizner on May 29 while visiting a San Diego home nearly demolished by wildfires. “Take the step today to update your home inventory and review your insurance policy to protect your home.
You may need to buy specialized coverage to cover your losses, the department said. Unless provided by separate endorsements or additional “wraparound” policies, fire insurance on properties in brush fire prone-areas may not provide for temporary living space, personal property and landscaping costs.
Policies and Endorsements
The best and most commonly sold policy for fire insurance is the HO-3, Special Form, policy, says Philip Gajic, an agent with the Mark Ball Insurance Agency in Malibu.
Covering more than fire and water damage, it includes coverage for theft and vandalism as well as coverage for personal property, personal liability, loss of use as well as other structures, such as pools, fences and tool sheds.
The HO-3 also offers endorsements such as building code upgrade, contents and dwelling replacement cost, and extended dwelling replacement cost.
Excess, or umbrella coverage, provides additional personal liability insurance against bodily injury or property damage claims against the insured that are a result of the insured’s negligence. Besides extending the underlying liability of home insurance, the umbrella covers rental properties and vacant land.
Gajic recommends the minimum $1 million excess coverage with the annual premium of $250 to $350.
Contents coverage is generally 50 percent to 75 percent of the dwelling coverage. Gajic recommends photo or video of contents and all rooms and exteriors.
The Department of Insurance publishes a “Home Inventory Guide” at no charge, which demonstrates how to catalogue possessions and record their values.
The inventory and financial records should be kept in a safe place, such as a safe-deposit box or relative’s house.
Residential property owners have “loss of use” coverage, generally 20 percent of dwelling coverage, Gajic says. Loss of use covers the cost of living elsewhere while your home is being repaired or rebuilt.
Commercial property owners have “time element” coverage for business interruption, extra expense, and loss of rents and rental value coverage.
Landscape coverage is usually incidental, offering only $500 to $2,500 in protection, Gajic said.
Replacement or cash value?
When reviewing your policy, it’s important to know whether “replacement cost” or “actual cash value” valuation formulas are used.
Replacement cost policies cover the full price of repairing or replacing the damage to property, without deducting for depreciation. For example, a replacement cost policy with a $500,000 coverage limit on the dwelling would cover the cost of replacing a $500,000 house, regardless of whether the house rose or fell in value.
Actual cash value coverage pays the fair market value of the dwelling up to an identified policy limit. Fair market value is determined by an appraisal based on comparisons to other similarly situated structures, less the value of the land. Payment is limited to the value of the policy, regardless of whether the value of the house increases.
Carriers generally use extended dwelling replacement cost, which provides a certain percentage over the policy limit to rebuild your home, Gajic, said. For example, if a home is insured for $600,000 and has 150 percent extended dwelling replacement cost, the total replacement cost is $900,000.
People should contact a general contractor to estimate replacement cost per square foot, Gajic emphasized. Replacement cost should take into consideration the home’s location foundation and building materials.
For a landside home in Malibu, the cost per square foot should be $200 to $250 per square foot, and on the beach $250 to $350 per square foot, Gajic said. Property owners should check this cost every year.
Legislation establishes a 24-month period for homeowners to repair, rebuild or replace their home after a declared state of emergency, commencing with payment of actual cash value. Effective this year, additional living expenses are also covered for two years after a declared state of emergency.
“Brush score”
Farmers Insurance Co. and its underwriters use a brush score underwriting method, rather than zip code, on all new policies written, Gajic said. The score, 0-12 (anything over 12 is ineligible) reflects the amount and type of brush in an area, fuel load, slope and road access. Homeowners should have 250 feet of brush clearance. If the home has a wood roof, the score is 0-10.
Building code updates
Even property owners with replacement cost coverage may come up short, since code upgrades may be required during the repair/rebuilding process. Gajic recommends a “wrap-around,” or difference in condition policy, to close the gap. Code upgrade coverage ranges from 10 percent to 50 percent of the dwelling cost.
Lending options
Bankers can be another resource in planning for disaster recovery, said Robert Alviani, an area manager for First Bank. They know rebuilding costs, since banks work with insurance companies on construction loans.
Home equity lines of credit might be used to repair the house if a structure is still sound, Alviani said. A gap loan can provide funding before insurance claims are finalized.
Like state officials and other insurance professionals, though, Alviani still stresses the importance of annual insurance reviews with your agent.
“Your home is often your highest valued asset so it’s important to know how much it will cost to restore it to its original condition. Find out what insurance would cover and what you would have to pay to get replacement coverage.”
More information and brochures on residential and commercial insurance, can be obtained by contacting the California Department of Insurance, consumer hotline 800.925.HELP, or online at www.insurance.ca.gov.