Lessons from the North Bay Fires

If you research carriers, you will see that their customer satisfaction ratings are fine. The reason, according to Trouette, is that 90% of their claims fall into an average category. Most people tend to have smaller losses so carriers insure to that type of loss. The 10% of claims that are outside of the bell curve of the average claim end up being the ones where people have trouble.

Many carriers base their coverage on average losses. So, if you have a $5,000 claim you won’t find out that your policy has a sublimit on rebuilding to new code. It is only on large losses where consumers begin to see the built-in protections the middle-market carriers create to protect themselves. People with small claims walk away satisfied, but those who have major claims do not. If the consumer satisfaction surveys used dollar amounts of claims to weight customer satisfaction surveys, the ratings would be much different.

Consumer-based sites and tools are “really useless,” according to Trouette. The California Department of Insurance maintains a website and database. To illustrate its weaknesses, Trouette compared policies from AIG and State Farm on its site. It showed that both policies had 100% coverage, but the State Farm policy included 20% extended replacement cost. Yet both showed just “replacement cost” coverage on the site.

“The only way to ensure proper protection is to read the policy,” he said.

He cited an example of a North Bay resident with a USAA policy who was $325,000 underinsured. That person, he said, doesn’t even know what the coverage will be for the home’s contents. USAA responded by saying that it met its responsibility by telling the insured that it informed them of the minimum amount of coverage they should obtain. Trouette said he has never seen a USAA policy that insured for the full replacement value. “It is not a bad carrier,” he said, “but they do not know what they are doing in California.”

Other carriers – like State Farm and Farmers – are much better, he said, and get replacement cost right.

North Bay residents had an advantage because of media coverage which, for example, exposed non-performing carriers. Residents got help from politicians too. But, Trouette warned, those suffering losses that are not accompanied by wide publicity wrongly think they are safe because they believe “it won’t happen to them.”

Properly insuring the contents of a home

Some items, like jewelry, which have personal significance and can and should be insured. Art, jewelry, china and silver must be itemized. There is coverage, he said, but with limits if you don’t itemize with what is sometimes called a “personal property floater.”

“Itemize important, high-value property,” Trouette said. Homeowner should review their itemizations yearly, especially if they are actively buying or selling items.

Contents coverage is usually based on a percentage of the replacement cost of the home. Homeowners should list all their contents on the appropriate form – everything, he said, “from spices to finger-nail clippers.” Give this to the carrier, who will tell you the depreciated value.

Trouette told a story of someone whose house was insured for $739,000. Their insurer, State Farm, offered $554,000 (75% of the coverage) for the contents. The homeowner took deal because they didn’t want to itemize the contents – possibly because they were emotionally overwhelmed by the loss.

If homeowners don’t want to make a list of their contents, he said taking pictures is a great idea

“Most people are very surprised when they learn of the process for dealing with the contents and the rebuild,” he said.

Replacement cost

Homes should be insured for their rebuild or replacement cost, not for the appraised value or what a homeowner thinks is its market value.

It’s critical to get an accurate estimate of the replacement cost. Trouette told of a situation where Chubb correctly determined a home’s replacement cost was $2.5 million, but Safeco suggested only $763,000 of coverage, based on the types of homes it typically insures. A naïve consumer would have been victimized, Trouette said, by being underinsured, possibly in order to save money. “Safeco doesn’t expect to cover $2.5 million homes,” he said, and misestimated the replacement cost. Make sure you are using current cost-per-square-foot estimates for replacement cost, Trouette said.

If you want to use a carrier that is not used to insuring your level of home, pay a contractor to give you a bid, Trouette said.

Some policies will pay no more than cash value of the damage to a home until actual repair or replacement is complete. But other policies have replacement-cost coverage, which is much better and will pay you whether or not you repair, replace or rebuild. This is very powerful advantage but, he said, both policies read very similarly.

He told of a homeowner who had a house with a replacement cost limit of $802,000. The homeowner got a contractor’s bid to rebuild it for $841,000. The insurer, in this case Travelers, estimated it should cost only $671,000 to rebuild and won’t budge. The $170,000 difference must be made up with after-tax income by the homeowner, Trouette said. Travelers will find a contractor that will rebuild the house for its estimate, but it will take no responsibility for the ongoing relationship. If the contractor ultimately cannot meet its commitment, it’s up to the homeowner to resolve the problem.

Don’t assume that you get a lawyer to resolve this for you. “It is costly to sue,” Trouette said.

Trouette said he has seen great experiences with Travelers. “If the homeowner had a better policy he would not be in this position. He needed a policy with an agreed value to replace the house.”

Some policies offer what is called “extended replacement cost,” which gives the homeowner a cushion. For example, a 25% extended replacement cost rider on a $1 million policy gives you $1.25 million of coverage. But, Trouette warned, this is not an excuse to intentionally underinsure a home in order to save money on premiums. This cushion is intended to cover things like inflation and changes in the cost of labor or material to rebuild the home.

If you have a loss

Before you hire an agent, ask if they will help with claims. That way, if you have a loss, you can ask your agent for help. Some agents who work for a carrier won’t do this, Trouette said, but independent agents generally will.

Always communicate with the carrier via email, Trouette said. If you communicate via phone, follow up via email to document the conversation.

Don’t change your building plans until you’ve agreed with the carrier as to what you are going to build. Don’t make changes unless you agree that it is cost-neutral, he said.

When you rebuild you must bring your home “up to code.” This affects issues like testing for lead and asbestos, and new energy codes. Policies should include something called “ordinance and law” (O&L), which is also referred to as building-code upgrade coverage, he said. Carriers treat the O&L as a separate loss covered at a potentially lower rate. O&L coverage is generally an “extra” coverage

“When an insurance carrier says ‘extra,’” Trouette said, “it usually means less” Carriers call out specific coverage like sewer backup or building code upgrade in order to put a limit on potential claims.

“It’s not hard to hit a $100,000 O&L loss on a $1 million home built in the 1970s,” he said. “It is worse if you are underinsured and have an O&L loss.” This is because the O&L sublimit is calculated on the basis of the replacement cost on the policy’s declarations page. On a $1 million home that will cost $1.5 million to rebuild, a 10% O&L coverage grant is only $100,000 versus $150,000.

Sometimes homeowners get tired, give up, put the lot for sale and move to a smaller home, Trouette said. “Stress is a really big deal,” he said. “You need the right people and coverage behind you – or at least know that you have made an informed decision.”

“I’ve never heard a positive story about a third party adjuster,” Trouette said. “They have no credit with the carriers. Carriers don’t care what TPAs think. TPAs are very aggressive and will show up while your house is still on fire.”

Some policies include loss-of-use coverage, but Trouette warning that this is often underestimated and, as a result, can be costly. A 12-month loss-of-use policy is not enough, he said. It can take seven months to get an estimate and start building. Prices rise quickly when there is a loss like there was in the North Bay, he said. Middle-market carriers won’t help with loss-of-use coverage. He recommended two years as the minimum for loss of use.

Don’t cancel your policy when you have a fire, he said, because you need it to cover the contents of your rental. In addition, a big loss often makes you uninsurable, so you don’t want to be without any coverage.

He offered a final bit of advice for when you begin rebuilding your home, “The road to recovery is paved with city and country bureaucracy and permits.”

Here is a description of the services that Tourette offers, and here is an explanation of the often-confusing jargon that confronts homeowners when they buy insurance.

Read more articles by Robert Huebscher