As we hear stories of the lost homes from the Marshall Fire, the pattern is clear. Most of us are underinsured when it comes to homeowners and renters policies.
The dwelling coverage that we have on our homes in many cases is not sufficient to prepare the site of a burned home and rebuild it to code. Also, we shouldn’t forget the plight of renters whose homes were destroyed. In contrast to homeowners, who must have insurance if they have a mortgage, a significant percentage of tenants do not have renters insurance.
When homeowners who have lost everything learn the news that they’re underinsured, the natural reaction may be shock and confusion. After all, the most common approach when you purchase a homeowners policy is to contact an insurance agent. They collect information from public records and you about the square footage, location, type of construction, number of bedrooms and bathrooms, and quality of finishes of your home. The insurance company then pulls data from industry sources to generate an estimate of rebuilding costs for your home.
You’re relying on their expertise. After all, insurance carriers are in the practice of rebuilding homes as part of their business. In your lifetime you may never build a home, so most likely have little knowledge of the costs and challenges.
Yet in spite of this information imbalance, it mostly falls upon you to come up with an accurate estimate of the cost of rebuilding your home. How can this be?
Most homeowners policies will only cover up to the amount of the dwelling coverage on the policy. If you live in an $800,000 home and have $400,000 in dwelling coverage, it’s possible you would only be able to spend that much on rebuilding your home.
If you’re fortunate, your policy may have something similar to extended replacement cost coverage, which adds a percentage to your dwelling coverage to cover a total loss. So in the previous example, if you had 25% extended replacement cost as a feature of your policy, you may be able to use up to $500,000 to rebuild.
Even rarer is guaranteed replacement cost. With these policies, the insurance company is shouldering more of the risk of a catastrophe befalling your property. While policy terms can differ, in general with guaranteed replacement cost coverage the insurance company has the responsibility to rebuild the home even if it exceeds the dwelling coverage.
We shouldn’t forget renters insurance, as it’s needed to cover any losses to your personal belongings as well as the cost of relocation, temporary living expenses including hotel stays and temporary lodging, and securing a new property. While dislocated renters may not suffer the same magnitude of financial consequences as homeowners, their personal finances may suffer mightily in case of a loss.
My recommendation to you is to speak to your agent or insurance company. If you don’t have renters insurance, get it. Homeowners should verify the level of dwelling coverage and whether you have additional policy features such as extended replacement cost. Determine whether guaranteed replacement cost is an option for you. Think hard if you believe that your current dwelling coverage would be sufficient to prepare your land and rebuild your home.
Finally, there are stories of some insurance companies asking for an itemized list of everything a fire victim owned that was destroyed in the fire in order to process a claim. We’re talking about the number of shoes and sweaters, the type and condition of bikes, holiday ornaments, and toys and sports equipment.
I recommend everyone walk around their home with their phone and narrate a video of everything they own. Open up closets and drawers. Look in your basement and garage. Once the video is done, make sure it’s stored in the cloud. I hope you never need this video to back up a catastrophic claim, but we need to learn from the misery and loss of our neighbors.
David Gardner is a Certified Financial Planner professional at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change.