After the fire...

Part 2 of a 3-part series

This is the second in a three-part series by Tim and Margaret O’Leary, whose Fallbrook home was destroyed by fire in November 2003 and has since been rebuilt. This installment focuses on the insurance difficulties that can follow a fire.

Insurance

Most people don’t worry about their house burning down or getting blindsided when their homeowner’s insurance falls far short of the cost to rebuild. I have a word of advice for you: Worry.

Houses can and do burn down, often and for many reasons. The spate of wildfires that have crisscrossed most of San Diego County over the past four years have destroyed thousands of homes and disrupted tens of thousands of lives.

And, unfortunately, insurance shortfalls happen just as frequently. Bloomberg.com, a highly regarded financial news service, reported in August: “When there’s a disaster, the companies homeowners count on to protect them from financial ruin routinely pay much less than what policies promise.”

Despite 12 years of post-secondary education that includes a master’s degree in business, as well as my current profession appraising real estate and businesses, I was blindsided and befuddled by insurance procedures and a yawning gap between what our policy seemed to promise and what it actually provided.

First there was the $7,200 shortfall in the policy’s temporary housing allowance. The policy paid for one year. At the end of the agonizing 18-month rebuild period, short by San Diego standards, we were out of pocket for six months of renting a golf course condo alongside Pala Mesa Resort. Allstate’s adjustor refused to budge. All the while, the mortgage payment notices continued to arrive like clockwork for a burned-out residence my husband and I could not occupy.

Then we needed to come up with an additional $250,000 to rebuild a house that was substantially similar to the one that burned down. The home’s footprint could not change without requiring a more complex building permit from the county. Much of the shortfall was attributed to construction cost increases in recent years and the need to conform to building code changes that had been enacted since the original house was built in the 1950s.

The driveway was torn up by the bulldozer, and that cost another $18,000 to replace. Replacing our burned out and crushed irrigation lines, as well as moving and other sundry costs, added another $5,000.

Lastly came the lawyer, whom we paid $2,000 to see if we could sue successfully our insurance company. It was a crapshoot, he said, and that fee was another financial bite we could have avoided.

A parade of independent adjusters contacted us in person or by phone to offer their services at a 10 percent cut. We politely declined after friends and advisors said that hiring an adjuster could lengthen the settlement and rebuild processes.

Ouch! All this new debt, measured against a slim rise in our home equity, put a crimp on my plans for early retirement and frequent travel.

Now we’re older, wiser and smarter. Our empathy for the people who lost homes goes beyond sharing the despair they are suffering. We can also anticipate the insurance minefields that they will soon encounter.

We have taken many steps since our house burned down. We are more mindful, fearful even, of fires that can begin in and outside our home. We pray that lightning doesn’t strike twice, but if it does we want to face it on a more solid financial footing.

In writing this piece, we asked a longtime Fallbrook independent insurance agent how he protects his home and belongings in such a fire-prone and financially vulnerable environment.

“Take it off the bottom and not off the top,” Robert Bell said emphatically. That means, he said, to go for full replacement cost but take a higher deductible to keep the insurance premium affordable.

That’s where we apparently screwed up at or after we purchased homeowner’s insurance for our Fallbrook home. We thought our replacement cost policy would actually pay all reconstruction costs. As it turns out, we had failed to keep tabs on changes in the insurance industry in recent years.

Large payouts due to wildfires, hurricanes and other natural disasters have prompted insurance companies to shift the risk of rising rebuild costs onto consumers’ shoulders. They still call it replacement cost but there is usually a policy limit, unless the homeowner determines current rebuilding costs.

Bell advised homeowners to be sure that their coverage meets or exceeds the actual cost to build a new home. To do so, keep tabs on home construction costs in your area. Don’t use resale homes as a barometer because they don’t reflect current building costs. And don’t rely just on the cost of new homes in your area. That can backfire because builders can cuts costs because they build many tract homes at a time.

A current rule of thumb, Bell said, is to insure the average custom Fallbrook home based on a coverage amount of $200 per square foot. Our home was insured for $73 a square foot.

Setting the deductible on your policy for an amount as high as $5,000 will lessen the bite of the annual premium. Roughly $100,000 of additional dwelling coverage can be obtained in a policy for the same premium amount if the customer agrees to absorb an additional $1,000 of deductible risk.

Raising the amount of a customer’s deductible limits forces homeowners to cover any minor damage themselves. But this way, enough coverage will be available if homeowners need it in the wake of a disaster.

The additional premium is small compared to the peace of mind of being fully insured.

The California Department of Insurance gives some solid advice in this arena. Its warnings include: “There is no substitute for reading your policy and your renewal declarations carefully.” Check out the advice to homeowners at the Web site http://www.insurance.ca.gov.

Fortunately, our policy’s category of our personal property insurance provided a silver lining, even if we had to use it to backfill the construction cost deficit. That coverage should also be adequate. Our policy paid us $135,000 for our belongings after we spent three months recalling and detailing our losses from two blended households.

If you don’t itemize the value of specific high-cost items such as jewelry art and collectibles, the insurance company will rely on its own per item limits for such belongings.

Creating this inventory process was crucial, as we ended up plowing all but $10,000 of that property settlement back into our rebuild costs. It is another instance in which having sufficient structure protection is crucial.

The amount of coverage for personal property, outbuilding coverage and demolition and building code upgrades is often linked by formula to the policy’s building replacement limits.

To avoid much of that months-long hassle, experts say to document your home, art and possessions through photographs and property lists. Keep this documentation in a bank safe deposit box or some other off-site location with other crucial family records. Your insurance adjuster will love you, Bell said.

“A documented file is a closed file,” he said.

And, finally, don’t be afraid to push hard for your insurance rights. Instead of hiring a public adjuster or an attorney, try to work with your insurance company and their adjuster. Insurance companies are heavily regulated and must meet their contract obligations and bargain in good faith.

If your claim is not handled quickly or you are being unfairly treated, ask to talk to your insurance adjuster’s boss. If that fails, you can file a complaint with the state Department of Insurance. The forms are available online. The department will mediate with the insurance company and order the company to respond to your complaints.

We did it the hard way and it took a lot longer than it should have and it cost far more than we ever imagined. We redecorated on the cheap, haunting estate sales, antique shops and thrift stores for art, furniture, clothing and other accoutrements of day-to-day life.

Yet we have rebuilt. We are home. We are survivors, stronger and a bit wiser than we were four years ago.