Fire Insurance: Rebuilding Your Home after a Fire

Full Transcript: Free Advice Interview with an Insurance Industry Claims Consultant

The following is a transcript from an interview with an insurance industry claims consultant with over 40 years of experience. The consultant spent the first 25 years of his career working for insurance companies and spent the next 25 years plus as a consultant for law firms that represent homeowners and claimants. We spoke with him about wildfires in California and how catastrophic losses affect how homeowners must deal with their insurance carriers in the rebuilding process.

Interviewer: Can you explain how will the recent California fires affect homeowners?

Claims Consultant: Well, if history is any teacher, we’ll probably find out that another carrier or two have decided that they’re going to pull out of California with the recent fires up in the Tahoe area. It seems like we have more than our share of catastrophes and every time that occurs, we loose a carrier or two and then of course everybody’s insurance rates will be affected, one way or the other. They’re going to go up.

The carriers are going to maintain their income and their profits, so the only way they could do it when they have catastrophic losses is to increase the premiums. That’s my perspective anyway.

Interviewer: Is it fairly common for carriers just to pull out of the state when they experience great losses?

Claims Consultant: I wouldn’t say it’s common, but they frequently do. We have seen them do this; the Northridge earthquake was prime example of a situation where a couple carriers pulled out. I think that State Farm indicated it would stop writing new business, so that doesn’t mean that they’re pulling out of the state, but they’re not taking on anything new.

They don’t have to pull out of the state. They can rewrite their policies. They endorse their policies to where they exclude a lot of the things that were covered in the past. So from that standpoint, that’s the way it’s affected.

Interviewer: Can you explain the difference between replacement cost and guaranteed replacement cost?

Claims Consultant: The replacement cost would be that you’d get replacement cost up to the limits of your policy. So, in other words, if you had $200,000 coverage on your home, they would replace everything without deduction for depreciation up to the $200,000.

With guaranteed replacement costs, let’s say you have the same $200,000 on the house and you had $300,000 worth of damage. If it would take $300,000 to replace it, then they would pay $300,000 because it was guaranteed replacement, so it’s a huge difference.

Interviewer: And do most insurers still offer guarantee replacement costs?

Claims Consultant: Hardly any of them do. It has become a major issue. It was so prevalent in the Oakland fires in the early 90’s, and then again when the Northridge earthquake hit in 1994, that most carriers stopped writing the guarantee replacement costs probably in 1996 or 1997.

Interviewer: So what can consumers do to make sure that their home is sufficiently insured now that they can’t get the guaranteed replacement cost?

Claims Consultant: Back in the old days, we had some kind of a form that they would fill out to calculate the square footage times so much per square foot and we’d come up with the amount of the structure. Well, now that’s computerized, but still, it’s based on the replacement costs. It’s far less than what the actual cost is, however.

Take the Tahoe fire, for example. Perhaps some of those homes that were destroyed were nothing more than just run of the mill cookie cutter type track homes. But when they burn in a catastrophe like that, we know 250 structures that were destroyed. There’s going to be a shortage of contractors on every house that’s rebuilt up there.

Also, is a rebuilt house there going to be a custom built house? If it is going to be a custom house, a rebuilt structures track number of, say, $80 or $100 per square foot to rebuild a home is just not acceptable. So what they really have to do is go to the expense of getting some kind of research done that will tell them what the cost per square foot for the construction costs in their area. If they’re in Tahoe or a hard to reach area, then it’s going to be more than someone will pay down on the plains.

So, all of that goes into the equation – the cost per square foot times the square footage of their structure that they need to rebuild and they’ll come up with the amount of insurance. Now, you would think that the insurance companies would do this, but because the more insurance they sell, the higher the premium and the more they make. So, they’d rather sell less insurance to keep more customers.

When one carrier starts doing that and then some other carrier that’s not doing that is not as competitive, they’re going to lose business. It’s a vicious circle.

Interviewer: Should policyholders be looking at their replacement costs regularly, especially those that simply renew their policy with the same insurer year after year? Should they be checking their policy just to make sure that their replacement costs has gone up or that they should talk to their agent about that?

Claims Consultant: Most carriers have what’s called “inflation guard”. It doesn’t cost anything; it’s just something that’s a selling feature. Policyholders will get a cost of living increase or cost of construction increase in their area and that will increase their policy.

That’s all well and good, but the costs never stay up with it. We saw a case recently where a homeowner up in Tahoe and it’s a little bit different than usual in the sense that she had tried to increase the rate, but the insurer didn’t actually do it until after the fire.

Her replacement cost was about $150,000 lower than it should have been, so she’s going after them to reform the contract and may be successful in doing that.

Interviewer: Is it the insurance company’s duty to tell a policyholder if they’re underinsured or is that something that the policyholder needs to do?

Claims Consultant: It’s the agent’s duty and it’s the insurer’s duty, but policyholders should stay on top of it. You often see this type of situation with policyholders in their 70’s and 80’s. They’ve been with the same carrier for 30 years and may be way underinsured. The personal property contained within the structure is based on the structure itself, so it’s 50 or 70 percent of the structure. So if the structure is way under-insured, generally speaking, the personal property is going to be under-insured also.

Interviewer: Is there any reason why an attorney wouldn’t take a fire damage case?

Claims Consultant: Unfortunately, it’s not worth the fight in some cases because there are too many people involved – especially in a catastrophic situation like the Tahoe fires. They’re going to have two or three different adjusters and maybe as many as six or eight or ten adjusters by the time it’s all done.

You can’t depose them all and it leaves holes because these guys are from all over the country and to start deposing them can be very expensive.

Interviewer: If they can’t find an attorney to do this, what should they do?

Claims Consultant: Chances are they can find someone to do it if they want to pay them by the hour, but it’s important to realize that that’s not feasible in most cases. First of all, they may not have the money and secondly, they shouldn’t be doing it because by the time the case is done, they’re going to owe the attorney more than what is at stake.

They should be persistent about going after their insurance company if they think they are right. They can also go to the Department of Insurance for help. Unfortunately, while some of the insurance commissioners are pretty good, some of them are not.

They can complain to the home office of the insurance company that’s handling their claim that they’re insured with if they think benefits are being withheld, but it’s a tough issue for many because these fire claims are really sometimes very messy with a lot of people involved and not a whole lot of money at stake.

Interviewer: How would a homeowner find out what their home is worth after a fire?

Claims Consultant: The cost is always so much less in a track home. It’s still a lot more expensive to build one home than it is to build 20 homes if you’re building them side by side.

So anytime there’s a fire, the house being rebuilt for the most part has got to be considered a custom home because that’s the only one the contractor’s doing and so the cost is going to be greater.

In these cases, the homeowner is going to have to provide the contractor with certain information such as whether the walls were plaster or drywall, whether the foundation was raised or on a slab, was there carpeting or wood floors, etc.

All of that kind of information goes into it and the contractor will come up with what he can replace this house for and with certain specifications and a cost per square foot to replace the home.

Interviewer: Should homeowners really be aware of the smaller details of their home such as carpeting, trim, etc.?

Claims Consultant: Well certainly, they should be. They can take video recordings or pictures of their premises. Nothing speaks better than a photograph or a video.

About 30 or 40 years ago, the insurance industry had a little program where they wanted everybody to photograph all of their personal items. Then, all of the sudden, they started having a higher than the normal rate of thefts. After that, the insurance industry didn’t think it was such a great idea…

It’s always a good idea to keep videos and photographs of your home and your personal belongings off premises in case of a fire.

Interviewer: What percentage of cases that come across your desk would you say that homeowners actually have photos or videos or photographs?

Claims Consultant: Most of them have something, but they can go back and recreate and that’s one of the things that you would want to tell the homeowner that after a fire.

They shouldn’t wait to sit down and go room by room in their mind and describe their home and personal property in as much detail as possible. The longer they put it off, the more difficult it becomes later.

Interviewer: How long would you say it normally takes to repair a home after a fire?

Claims Consultant: It’s difficult to say because there are so many factors going into it, which is why insureds should do everything that they are required to do as rapidly as possible.

You’ll see a lot of people complaining about the delay, but in many cases, the adjuster may be waiting for the policyholder to provide data. It’s important that adjusters and contractors get the information they need as soon as possible.

The Northridge earthquake created a lot of these types of cases and many of those are still ongoing – many years after the event.
It’s the same with the Oakland fire and the 2003 fires in San Diego and San Bernardino. You know, there are still a lot of those cases out there, but it’s just a long process and sometimes, there are just not enough contractors to go around.

The reason why it takes so long in some cases is because the insureds are delayed in getting a contractor out to their home. In other cases, they have gotten a contractor, but that contractor is from, say, Little Rock, Arkansas. Do you think he knows what the prices are in California versus what they are in Arkansas? I doubt it. Although, in today’s world that’s probably not a huge issue because they’re using computerized programs to come up with the estimate and on a replacement situation. They’re just using the square footage and guessing on the quality of the structure they’re replacing.

Interviewer: How do insurance companies deal with water damage that’s done by fire fighters and is there a mold concern when that happens?

Claims Consultant: God bless the fire fighters, but they do often times do more damage than the fire does from thumping around on the roof, breaking the tile and the amount of water that goes into the house. As a result, mold is going to occur if there’s water damage if it is not removed and aired out.

Mold itself is excluded, but a lot of policies in the last couple of years have started endorsing the policy and giving the homeowner a $1,000, $2,000, maybe even a $5,000 mold coverage endorsement.

Interviewer: What should homeowners do when they simply can’t find a contractor to rebuild or repair their home?

Claims Consultant: Well, they just have to keep looking and they have to be very careful because there are some people who come up there from out of state that had their licenses revoked. Homeowners have got to make sure that they’re dealing with a licensed contractor and that he’s bonded. They just got to keep looking and may even have to go out of pocket to get somebody up there to give them an estimate.

Interviewer: Is getting a contractor the homeowner’s responsibility or the insurer’s responsibility?

Claims Consultant: Well, probably the homeowner. The insurance company doesn’t promise to repair the home – they’re just going to pay for whatever it costs to repair and they’re going to send a claim rep out there and he’s going to prepare an estimate. It really falls on the insured to find somebody. A lot of times these insurance companies will have contractors that don’t even intend to do any building. All they’re doing is coming around and writing estimates and/or supporting the adjusters’ estimates. They’re kind of hired guns.

Interviewer: What should consumers be aware of when they have a contractor repairing their home that has suffered smoke damage?

Claims Consultant: Well, there’s always a lot more damage than anybody thinks. It’s going to penetrate the walls, the ceilings, the wallpaper, etc. Whether or not they can clean it satisfactorily is an issue that each claimant will have to determine personally. Some people are far more bothered by smoke than others.

A long time ago, I remember when we had a state senator that claimed that he was allergic to any kind of smoke. After a fire at his place, the contractor took that house all the way down to the rack and rebuilt it. Trying to eliminate the smoke smell can be a big issue for some. We’ve had lawsuits over those issues and nobody wins.

Interviewer: Do insurance companies expedite a claim where a house has been partially burned faster than one that has been completely destroyed?

Claims Consultant: It should be easier to adjust a totally burned down house and get it started than a partial. When you say a partial, I’m talking about a substantial partial, you know, maybe 30-40 percent of the structure is lost to fire, so that’s going to take longer.

The question of whether or not the house can be saved depends on how much damage was done. The issue of whether the house should be totaled or not can take an awful long time because there’s just never any agreement. The cost to replace the structure in total might be $325,000 and the cost to repair with everything figured in is $250,000. So, there’s a $75,000 difference. While the whole process could be done in 60 days, it’s more likely to take six months.

Interviewer: When it comes to getting these things done, does the squeaky wheel get the grease in these situations?

Claims Consultant: Absolutely. A homeowner should do everything that is required of him so that any delay is not on his shoulders such as getting the specs to the right person and doing an inventory of personal property. And yes, the squeaky wheel does get the grease, but in policy matters, you have to be careful not to alienate the claims people or they might now work as hard for you. Kill them with kindness, but stay after them would be my recommendation.

Interviewer: What are some of the major insurance issues that consumers should be concerned about regarding earthquakes?

Claims Consultant: Well, most of the earthquake policies that people have today don’t cover very much. They’re very limited. There’s very little coverage for personal property and there’s hardly any additional living expense coverage and that because most of the companies have stopped writing it.

It’s not just an endorsement onto your regular policy. It’s a separate policy and it has separate coverages and it doesn’t follow your homeowner’s policy. It’s only up to the limits of your policy and an earthquake is tough coverage because you can look at a structure and not really know if there’s more damage than meets the eye.

An uneducated eye would look at it and say, “Well, that came through there pretty good” and it could have a lot of damage to it because there’s so much damage in an earthquake that you just don’t know about – from the cracks in the slab covered by carpet to tile roofs that are damaged to, you know, just about everything else. The shaking can cause the water pipes to burst, which can cause additional damage – the possibilities are endless.

Interviewer: What can consumers or policyholders do to just make sure they are adequately insured against earthquakes?

Claims Consultant: Well, get the coverage up as high as they can, but again, it can be cost prohibitive in certain situations. Unfortunately, most homeowners are never going to be fully covered under the system that the insurance industry has come up with and that California has endorsed as far as the earthquake is concerned.