I wrote my latest book, Surviving Wildfire: A Handbook for Homeowners, because I don’t want anyone else to go through what my husband and I did when our home in Colorado burned to the ground in a wildfire in 2011.
Like many people, we had no idea how a major loss claim worked. When we found out we’d have to account for everything we’d lost and calculate how much it would cost to rebuild our home in today’s dollars, we realized just how underinsured and unprepared we were. We treated our claim like a full-time job and got a lot of help from our adjustor and insurance company, State Farm. Eventually we collected our policy maximum. But we could have collected far more money with far fewer headaches and heartaches if we’d been fully covered and better documented.
Every year thousands of people lose their homes to wildfires, tornadoes and other disasters. And in the aftermath most of them say, “We never thought it would happen to us. If only we’d been better prepared.” Make sure you are never one of those people with disaster prep. Take steps now to get better prepared, better insured and better able to deal with the realities of starting over.
If you think you could do your inventory from memory, try this test. Close your eyes and write down everything in just one closet or kitchen drawer. Now go see what you forgot. Take photos or a video of everything inside and out to document your belongings. Open closets and drawers. Include the attic, garage, basement, barn and shop. You can use a voice-activated app on your iPad or smartphone. Try Knowyourstuff.org for guidelines. Store a copy of your documentation off premises in a safe place.
The 75 photos I took the day of the fire that helped us document our losses turned out to be priceless. We would have been in even better shape if I’d taken about 200 more. We did have great insurance, but we quickly discovered we didn’t have enough of it. Our plight is all too common: More than half the people who lose a home in a natural disaster are underinsured by at least 25 percent. That’s because most people base their insurance on what they think it would cost to buy their home. Or what the bank forces them to carry to cover their mortgage. Your insurance coverage should be based on what it would cost for a professional builder to rebuild your home today.
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The older your home is, the more work you’ve done yourself, or the more additions and improvements you’ve made without increasing your coverage, the greater the likelihood of your being underinsured. Home prices have just begun to recover from the recession, but the cost to build has climbed steadily each year, particularly outside of town. We were shocked to discover that our 12-year-old log home would cost more than twice as much to build today.
Chances are you’ll be shocked at the cost to rebuild your home from the ground up. Even if you would build it yourself, your insurance should be based on the true replacement cost of your home, including the cost of your own labor. Your best source for a realistic estimate is a good local builder. You can get a ballpark estimate for less than $10 from Hmfacts.com. Most insurance companies use standard formulas to determine how much coverage you need. Many times actual local costs are much higher, especially if you have a lot of hand-crafted touches or features like solid wood doors, hardwood floors, double or triple-pane windows or stone fireplaces. To see how much per square foot you’re covered for, divide your basic (dwelling) coverage amount by the number of square feet in your home, including your basement and attached garage. Let’s say you have a 2,000-square-foot home insured for $100,000. That’s $50 per square foot to rebuild—not enough money to rebuild by any standard. Be sure you tell your insurance company about any additions and improvements you’ve made that increased the value of your home by more than $5,000. You need to be insured to at least 80 percent of your home’s value. If you’re not, your payout could be reduced.
Instead of scrimping on coverage and coming up short when you need your insurance, save money by being smart about what you buy and how you use it. Think of homeowners insurance as major medical coverage for your home. One money-saving move is to increase your deductible. A higher deductible can save you at least 25 percent each year. Second, don’t file small claims. Too many small claims in too short a time make you a poor risk and increase your premiums.
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Third, try to bundle your coverage. You can save 5 to 15 percent on your insurance by using one company for all your insurance needs (auto- mobile, boat, motorcycle, home, etc.) And ask your agent what else you can do to reduce your premium without reducing your coverage. Discounts are often available for smoke detectors, sprinklers, burglar alarms, deadbolts, hail, wind- or wildfire-rated roofs, and more. Finally, always comparison shop. Coverage and premiums vary widely. Be sure you compare apples to apples.
Know What’s Covered
The dollar amount you’re covered for should be on the front or declarations (DEC) page of your policy. Riders and endorsements should also be listed. Reading your cover page is a good place to start. The following schedules are included in most policies. Percentages covered and terms of that coverage vary by carrier. Read your policy and go over the provisions with your agent.
Coverage A Dwelling: This covers your home and the structures attached to it, such as attached garages and decks. For insurance purposes, your dwelling includes everything that wouldn’t fall out if you turned your house upside down.
Coverage B Other Structures: Typically a percentage of Coverage A that covers structures that aren’t attached, for example, a detached garage, or shop; 10 percent of your dwelling coverage is common. If you have big barns and multiple outbuildings, 10 percent will barely make a dent in their replacement cost, so talk to your agent about supplemental coverage.
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Coverage C Unscheduled Personal Property: Personal property is every- thing inside and outside your home that would fall out if you turned your house or outbuildings upside down. Seventy percent of your dwelling coverage is typical, but percentages vary.
Coverage D Loss of Use: This provides additional living expenses (ALE) money if you can’t stay in your home due to an event (like a wildfire or other disas- ter) that’s covered by your policy. ALE can provide coverage for a specified amount of time, generally one to two years, for a percentage of your basic coverage, or for a flat dollar amount. If you are rebuilding, one year of ALE is usually not long enough.
Scheduled Personal Property: A typical homeowner’s policy has set dollar limits for certain types of personal property, including firearms, art, jewelry, tools and equipment, computers and business equipment. Read your policy for your limits. Dollar limits for many (but not all) categories are waived in the case of a total loss. The amount of any riders will be in addition to Schedule C coverage.
Landscaping and Trees: Coverage for landscaping and trees is typically a percentage (often 5 percent) of your dwelling amount. Loss per tree is lim- ited by a dollar amount.
Business Property: Most homeowners policies limit coverage for equipment and supplies. If you have a home-based business, talk to your agent about business insurance. The premiums are generally tax deductible.
Farms and Ranches: Working farms, orchards, vineyards, bee yards and ranches operated for profit need their own special agricultural insurance. Hobby farms and ranches are covered to some extent. Ask if you need hobby farm insurance if you board animals, sell eggs or other products, or have multiple barns and outbuildings or lots of equipment and tools.
Animals: Large animals, such as horses, cows and llamas, are generally not covered unless you have livestock insurance.
Replacement Cost Versus Actual Cash Value
Replacement cost (RC) means your policy pays the actual cost to replace an item at today’s prices, no matter how you got the item, what condition it was in, or what you paid for it–if anything. Your first check will be for the actual cash value at time of loss for your property—sometimes also called depreciated value. You’re paid the balance when you replace the property and turn in receipts.
Actual cash value (ACV), sometimes called fair market value, is what your home or property would sell for on the open market at the time of loss. Generally, cash value will only be a fraction of what it will actually cost to replace the item. For example, a big screen TV that cost $3,000 has an expected life of 10 years. If the TV is five years old and you have a cash- value policy, you’ll collect $1,500. If you have replacement value, you’ll be paid the depreciated value ($1,500) up front. When you replace the TV and submit a receipt, you’ll be paid the rest, up to the actual replacement cost for the same make and model.
Most home insurance policies from well-rated companies are for replacement value, but read your policy carefully and ask your agent. If replacement value isn’t stated, your coverage is only for actual cash value and you should upgrade.
Self-sufficient folks say that living with the risk of disaster is just part of the price they pay for living where they do. It’s a can-do, can’t-keep-me- down attitude that makes it easier to sleep at night. Being willing to accept the odds and acknowledge your risk is one thing. But neglecting to do everything you can to stack those odds in your favor isn’t being brave and in- dependent—it’s being reckless.
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If you lose your home or suffer serious damage, it will be all the things you didn’t do that will come back to haunt you. I’ve never talked to any survivors who wished they’d had less insurance or spent less time getting prepared. When you know you’ve done everything you could, you can look back with no regrets, and put your energy into putting your life back together.