IL Estate Planning Blog

Tuesday, January 30, 2018

Check your Insurance Policy for Fire Coverage

Check Your Insurance Policy for Fire Coverage 

Differences in policies across states and carriers could leave many homeowners with less money to rebuild than they need



By Leslie Scism and  Nicole Friedman

Wall Street Journal Oct. 20, 2017




Home insurance coverage has its limits, which many Americans discover after large-scale disasters like the fires that have been raging in California this month.


There are some fairly standard coverage areas, such as fire damage, in most homeowners’ policies across the country. Still, standard policies can saddle people with surprisingly large costs. Often, the maximum payout in a policy is insufficient to rebuild an entire home and replace its contents.


“So many clients don’t properly insure the replacement value for their homes, and they don’t understand what it would cost to rebuild their home today,” said Bob Courtemanche, private client practice leader at insurance brokerage Risk Strategies Co.



There are myriad subtle differences across states and carriers that could hit homeowners and leave them with less rebuilding money than they need. And those differences are growing: Policies are more varied than they were a decade or two ago, according to University of Minnesota Law School Professor Daniel Schwarcz.


California fire victims will generally find their policies cover fire and smoke damage as well as additional living expenses, said Loretta Worters, a spokeswoman for Insurance Information Institute, a trade group. That said, additional living expenses, such as temporarily relocating, sometimes are covered only if the home is damaged, Ms. Worters said. In that case, homeowners who are ordered to evacuate but whose homes aren’t damaged might not get payments for costs incurred. 


While it’s too late to increase coverage after your property burns, for some the recent California fires might be a wake-up call to the need to increase a policy’s limits or even get an entirely new policy. Property owners should start by trying to read and understand their policies; they also should contact their agent, or the insurer directly, because figuring out the appropriate amount of coverage is hard to do. 


Here are some important details to bear in mind.

         Homeowners sometimes forget to expand the amount of insurance coverage they have on their property after making home improvements, such as adding a new kitchen. If insurance coverage hasn’t been updated, homeowners may find themselves underinsured after a fire.


         Extra structures on the property are typically covered for up to 10% of the policy limit for the main structure, Ms. Worters said.


         Consumer advocates say insurers in recent decades have shifted to providing “actual cash value coverage,” which takes depreciation into account, rather than “replacement cost coverage.” Actual cash value coverage might not cover the full cost of replacing a damaged or lost item, leaving the consumer to foot more of the bill.


         Homeowners should keep an inventory of the contents in their home and store this list outside the home. Some homeowners should consider getting specialized policies for expensive items like jewelry or art collections.


         After widespread destruction in a community, labor and materials costs can spike, as many people seek contractors and supplies at the same time. An extended replacement policy generally pays up to 20% or more above the policy limit; a guaranteed replacement-cost policy pays whatever it costs to rebuild a home as it was before the storm, Ms. Worters said.


         Some policies—even a guaranteed replacement-cost policy—won’t pay for the extra expense of rebuilding to higher code standards, Ms. Worters said. Including coverage for such code upgrades may require an additional premium payment.


Some insurers also offer inflation protection, for an added premium amount.

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