Reality check Featured

8:00pm EDT July 26, 2008

How horrible to watch your American Dream go up in smoke. Even worse, to find out your insurance coverage won’t replace it. Winds can carry hot embers as far as 5 miles, meaning wildfires should be a concern to all of us.

Wildfire season started earlier than normal this year and already thousands of acres and scores of homes and structures have burned. The fire chiefs say this could be the worst fire season ever. Wildfires don’t just burn homes that are on the outskirts of town.

One obvious lesson we should have learned from past wildfires was the disparity in insurance policy performance after these wildfires. According to the Census Bureau, after the 2003 wildfire, only 46 percent of the homes had been rebuilt by late 2007.

Why do some homeowners restore their homes and quickly return to their lifestyle while others are left to haggle over major additional out-of-pocket expenses?

“Because all homeowner policies are not created equal,” says Mary Hammett, personal lines broker with Westland Insurance Brokers.

Smart Business spoke with Hammett to see what consumers should know about their homeowner insurance policies and how to select proper coverage.

If a fire destroys your custom-built home with lush landscaping, will your homeowner’s insurance policy cover the loss?

Probably not. Most people are covered by a mass-market homeowner insurance carrier and have been insured by the same agent for many years not realizing they have outgrown their policy. These policies are not designed for high-value homes with custom work or expensive landscaping like 50-foot-high palm trees. After the fire, homeowners often end up battling their insurance carriers to provide coverage that they didn’t realize they hadn’t purchased in the first place, delaying hope of rebuilding their lives fully and quickly.

What can consumers do to ensure they have the right policy for their custom home?

By working with an experienced independent broker, a policy can be tailored to their individual needs. Brokers have access to insurance companies who specialize in insuring high-value homes. These policies are designed to anticipate the needs and demands of these affluent homes and the lifestyles of their owners. These policies automatically provide broader coverage and can be customized to eliminate coverage inadequacies.

What is meant by ‘coverage inadequacies’?

According to the California Department of Insurance, as many as 40 percent of homeowners statewide lack the insurance needed to cover home replacement costs. It is challenging to determine replacement costs, especially for custom homes with many unique features and exceptional building quality and architectural design. Building costs are rapidly changing with international demand and the cost of gasoline. Because of such changes, high-value home insurance carriers provide an additional service to their policyholders with an on-site replacement cost evaluation. The inspection is very technical and is completed by a highly trained professional in construction and interior design. This in-depth assessment removes the guesswork and assists the homeowner in purchasing adequate insurance coverage.

Why is it important to have adequate coverage for your dwelling and other structures?

You need adequate dwelling coverage because policies do not guarantee replacement. Additionally, if your home is damaged or destroyed during a catastrophe, costs to rebuild can double overnight due to the huge demand on materials and labor to rebuild numerous homes at the same time. High-value home policies typically provide 200 percent extended replacement cost, providing you a sufficient buffer from catastrophic-loss increases. Most mass-market policies provide up to only 125 percent of the coverage limit. So if you are underinsured to begin with, exponentially the problem worsens if your loss is during a catastrophic event. This coverage difference alone equates to hundreds of thousands of dollars less coverage with which to rebuild your home.

What are other areas where policies may lack in coverage?

Loss of use. Most mass-market policies provide 20 percent of the dwelling amount with 24 months max, whereas high-value home policies provide ‘actual loss sustained’ without a dollar or time restriction.

Landscape coverage. Most mass-market policies provide anywhere from $2,000 to $10,000 total coverage for landscaping with a maximum of $500 for any one plant, tree or shrub. These policies also can’t add coverage should the need exist, whereas high-value home policies can insure those palm trees.

Building code. Most mass-market policies provide only 10 percent or 20 percent of the dwelling limit. The older the home the more important this coverage is since more building codes will have changed. High-value home policies include all building code costs with no capped payout, even when the costs exceed the coverage limit.

Contents. Make sure your policy provides replacement cost and will not depreciate the value of your contents. All policies have internal limits for certain items restricting coverage, so schedule fine art and jewelry or collectibles so these items can be replaced.

MARY HAMMETT is a personal lines broker specializing in the affluent market with Westland Insurance Brokers. Reach her at (800) 541-0711 x3217 or