Wild Fire Disaster Preparation - Part 2!

[This post is written and copyrighted by FIRE Finance (http://firefinance.blogspot.com).]

In Wild Fire Disaster Preparation - Part 1 we discussed immediate measures that need to be taken if we encounter a disastrous fire. Continuing from where we left off, today we discuss what our home insurance policies should cover to help us claim appropriate replacement costs for our damaged properties and valuables.

According to the Guardian (Oct 26, 2007), the recent wildfires in California have destroyed 1,500 homes, displaced half a million people, and caused an estimated $1billion in damages.

Will these homes be covered by insurance?

Most, if not all, of those homes will be covered by insurance. Unless we purposely set our home on fire, loss from fire is one event that is by and large protected by insurance. However, standard homeowners policies are full of fine print and exclusions, including damage caused by war, terrorism, flooding and earthquakes.

Insurance companies have already mobilized catastrophe teams to begin assessing the damage and write checks for additional living expenses. Hopefully, this disaster will be covered under standard, home, renters and business policies, as well as comprehensive auto policies. Nevertheless, homeowners who have not recently updated their insurance policies to account for renovations or higher building costs could end up short.

Will the price of home insurance premiums go up?

Eventually homeowners, possibly throughout the country (not California alone), might end up paying for the damage done by these fires in the form of higher insurance premiums. But chances are high that insurance premiums will be the highest in the regions worst affected by the disaster and its vicinity. For example, a house worth $475,000 might have a total claim of more than $1 million after we consider the insurance on contents, other buildings on the property and living expenses.

However, it is to be noted that insurance in California is highly regulated, and authorities are not likely to approve any increases in premiums, especially after pushing companies to reduce premiums this year. And, California is the largest market for homeowner insurance, a business which is still profitable despite the risks.

Unfortunately all these factors did not stop Allstate Corporation, USA's second-largest property-casualty insurer, from announcing earlier this year that it would no longer underwrite new California homeowner policies. They cited risks from wildfires and earthquakes as the reason for this move. In addition, Allstate is seeking a 12 percent rate hike for existing customers. Throughout the west coast, houses in high-risk areas are being inspected by major insurers. They have threatened to cancel coverage if homeowners did not clear brush or take other precautions.

How to prepare for a disaster?

There is no better route to deal with any situation than by being ready. So we need to learn the details before a disaster strikes.

Know the details of our home's insurance policy

Generally homeowners policies insure the replacement cost of the home. At a very minimum, mortgage companies require that borrowers have enough insurance to cover the value of their loan. However most homeowners opt for insurance that will pay to rebuild a house from the ground up, which is often higher than the value of our loans.

Still there might be caveats.

1. For example, unless we buy a policy that specifically covers the cost of replicating a special house, say for example a historical one, our insurance might not pay the money needed to replace handcrafted stuff or ornate stained glass. A standard policy covers home replacement with standard building materials.
2. If we upgraded our home but not our insurance, our claim might not be enough to replace recent renovations.
   
3. Similarly, rising building costs also could leave us short if we failed to update on an annual basis.
   

Do we have the right type of policy?

But with a disaster like the current wildfire that consumed nearly 250,000 acres on the west coast, there are going to be a lot of total losses. So people with standard policies will get only what is in the policy.

• A better deal might be extended or guaranteed loss policies that will cover above and beyond the standard policy amount. But the cost of extended or guaranteed loss policies is a higher premium.
• Also, how much we receive for the contents of our home destroyed by fire depends on the policy we purchased. For example, a policy that covers only the cash value of a home's contents will issue a check based on their actual value or current market price. That is, if our old computer is worth $175 now, we will receive only that much in our check!
• However, we can choose a policy that covers the replacement cost of our valuables. In this case, we might get $750 to replace our old computer whose market value is $175. Please note that there are limits for this type of policies too, more so in the case of expensive items like art or jewelry.
• Most homeowner policies do not insure the value of the land! So if the value of our property nose dives because the locality has been destroyed by fire, we are not insured against that loss.
• There are many policies which cover a part of the cost for replacing trees and shrubberies destroyed by fire or other covered disasters. A typical policy to this end often pays up to five percent of the value of the structure to replace landscaping. For example, a policy insuring $600,000 would pay $30,000 to replace the trees and shrubs. Often there are limits of $500 per plant.
  

Does our homeowners' insurance cover the cost of additional living expenses during a disaster?

Though many people are not aware, but the fact is that most comprehensive homeowners policies generally pay for the cost of staying in a hotel, food, clothing and other essentials. We noticed that during this wild fire, adjusters were already in California providing checks for additional living expenses.

However, we should make sure that our policy provides enough of an allowance to hang on while our home is being rebuilt. The hard truth is that we still have to pay our mortgage, even if we cannot live in our home!

What else should we do?

Let us reiterate that first and foremost, we have to find the right coverage and keep our policy updated.

• Next, we should create a home inventory.
  
• It is a good idea to photograph or videotape our home and valuables as proof of what we own.
  
• Finally, we need to store a copy of our inventory, insurance policy, financial and other important documents outside our home.
  
• A good option might be a safety (fire safe) deposit box or a secure web server where our files are encrypted and accessed through strong passwords and security checks.

Hopefully we have covered some of the most important aspects of our home insurance policies and inventories for our valuables. We look forward to our readers to add more tips (or opinions) to this article based on their real life experiences or those of their family and friends.

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Reference(s):

1. Guardian Unlimited: Goldenberg, S. "Bush tours trail of destruction from Californian wildfires."
2. Forbes: Gentile, G: "California Home Owners Have Insurance Worries."
3. CNN Money: Max, S: "Wildfire: Insurance when all is lost."
4. Associated Content: Hensler, M. "Consumer Group Gives Insurance Claim Tips to Wildfire Victims, Advises Caution."

Image Source(s): iStockPhoto

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