Publication Date: Wednesday, April 7, 2004

Trial by fire
Reviewing your insurance could prevent financial ruin

by Dana Green

For Oscar and Margaret Rosenbloom, the loss of their home to fire nine years ago is still painfully fresh in their minds.

The fire started at 10 a.m., after a candle was left burning in the attic. Although the house remained standing after the fire, the walls were weakened enough that the home had to be torn down and rebuilt. The home they had lived in for 20 years was gone.

"When you have a sizeable loss, you are in a state of shock," Oscar Rosenbloom said.

The destruction of the Rosenbloom's personal library was particularly distressing. Although they did not have written records, most of their rare books were still intact. They were able to identify each book to determine author, title and estimated value.

But first, the Palo Alto couple had to find out if their insurance would cover the cost of rebuilding their lives. "You have to gulp and look at your policy, see what you have," he said.

The Rosenblooms were forced to take a hard look at their homeowners insurance -- but it is best to do it before disaster strikes. In the wake of the Loma Prieta earthquake and the Southern California wildfires, insurance experts are recommending that homeowners take a closer look at their homeowners policies. Homeowners can save money -- and heartache -- in the event they lose their home in a catastrophe.

Although insurance policies are infamous for excluding major disasters such as floods and earthquakes, homeowners insurance should cover the cost of rebuilding a home if it is destroyed by fire. But that's only the case if one's home and possessions are adequately insured.

The following tips can help ensure homeowners have sufficient coverage and can file a claim quickly in the event a disaster occurs:

Conduct a regular check-up. The first rule of thumb with homeowners insurance: Don't just get it and forget it, Palo Alto State Farm agent Bob Anderson said. Anderson likes to sit down with his clients annually to review their policies.

"They walk out of your office and in eight years they make a claim," he said.

"That's why it's nice to review."

If a homeowner does not have a local broker or agent, he or she can carefully examine the policy to make sure it adequately covers the current home, its contents and any outbuildings on the property, such as a pool house or guest cottage. If the home has been remodeled, the original policy probably needs updating.

In the view of Chris Grammar of Allied Brokers in Palo Alto, if homeowners have not looked at their policy in a few years, it is probably not enough to cover the value of their home or personal property.

"If the client isn't checking, they're probably underinsured," he said.

Find out the costs to rebuild. The destructive Oakland fires were an eye-opener when it came to rebuilding costs in the Bay Area. With the steep slopes in the Oakland hills, the bill came in at $400 per square foot rather than the $100 national average, according to Grammar.

"If you're not insured for $200 per square foot, you're underinsured," Grammar said. "If your home is over 2,000 square feet, that bumps it to $300 to $400 -- at a minimum."

Both Grammar and Anderson suggest that homeowners get estimates from local contractors to determine the cost to rebuild their home. While most policies estimate for inflation using national figures, the amount might be laughable in pricey Peninsula neighborhoods.

If a home has features that will make it very expensive to rebuild, such as an intricate roof line, historic molding or a sharp slope, look into an additional endorsement to cover the expense. Also, make sure to cover the costs of building code updates -- if 50 percent of the home is burned, the homeowner is responsible for bringing the whole house up to code, Grammar warned.

Remember to base coverage on rebuilding costs, not a home's market value. If a modest-sized home is worth a million dollars, the cost to rebuild is probably less. If you are insuring your home for market value, in Anderson's opinion, "you can be wasting a lot of money."

Pay attention to limits and exclusions. If a mudslide destroys your home, what do you get? About $2,500, according to national averages.

When it comes to personal property, limits and exclusions get even trickier. There are limits for jewelry, computer equipment, furs, silverware and business property. For example, artwork that falls down during an earthquake is excluded in a standard homeowners insurance policy.

Look into an umbrella or "all-risk" policy, or getting an endorsement that covers those specific items, if the replacement costs of personal property are not covered by property limits, Anderson said.

Consider an additional policy if you run a business out of your home. An electrician who carries his tools in his truck will not be entirely covered in case of theft -- his tools are considered business equipment. There are severe limits on business equipment in the home -- and, often, no liability coverage.

Grammar recommended separate insurance if a home business gets quite a bit of foot traffic or involves expensive equipment. "If customers come over to your house on a regular basis, you probably need a separate policy," Grammar said.

Make sure you have adequate loss-of use-expenses. In the event of a catastrophe, loss-of-use coverage pays for renting a temporary home, hotel expenses, storage and other incidental expenses while you are rebuilding. The average three-bedroom unit rents for $2,783 in Palo Alto, according to RealFacts, a rental data collector. And in the case of a widespread calamity such as wildfire, where the whole neighborhood is affected, it could take as long as two years for swamped contractors to get to your home. Homeowners should make sure that their loss-of-use clause will give them adequate time and money to get back into their new house, according to Grammar.

Make an inventory. You remember you had a set of golf clubs, but what brand? Where did it come from? Insurance advocates recommend that homeowners keep a detailed inventory of their personal property. An easy method is to walk through the house with a video camera and describe possessions in detail. Have antiques or other valuables assessed so that you have a record of their true value, and safeguard the inventory off-site at the office or a family member's house.

Remember that property coverage needs to cover the replacement cost of personal items, not their actual value. A 10-year-old television set, for example, is going to need to be replaced with a new one -- at today's prices.

Evaluate whether you need earthquake insurance. There is a one in five chance that a quake of 6.7 or greater will hit the Peninsula segment of the San Andreas fault in the next 30 years, according to a recent U.S. Geological Survey probability report.

"Palo Alto is actually in a pretty vulnerable position," said Tom Holzer, an engineering geologist with the U.S.G.S. Earthquake Hazards Team in Menlo Park. "We're going to get shaken pretty hard."

Deciding to carry earthquake coverage is an individual decision -- and a difficult one. About one-third of his clients have purchased earthquake insurance, according to Anderson. "I have debates between husbands and wives about it," he said.

After the Northridge earthquake in 1995, many insurance companies raised rates or stopped offering coverage for earthquake damage. Premiums can be expensive and often deductibles are as high as 15 percent.

Those unwilling to take the risk should shop around for earthquake coverage, Grammar said. The state of California created the California Earthquake Authority (CEA) to offer earthquake insurance to Californians after Northridge. Other insurance companies still offer earthquake endorsements or stand-alone policies, but prices vary widely. Be sure to check limits and exclusions on any prospective earthquake policy.

All these additional endorsements and higher coverage, of course, often translate into higher premiums. The best way to bring premiums back to earth is to raise the deductible, according to Anderson.

"The average person makes a homeowners insurance claim every 9 1/2 years," Anderson said. "Most individuals will end up paying more in premiums than they would pay for a higher deductible." Homeowners insurance is designed to protect homeowners from a true disaster -- be prepared to pay a $5,000 to $10,000 deductible in exchange for lower premiums, Anderson said.

Both agents suggested paying out-of-pocket for smaller claims, like a stolen bicycle or a broken fence. Insurance companies will often refuse to cover clients with a string of small claims, forcing them to turn to high-cost insurance carriers.
Grammar advised filing one claim every five years to keep your claims record clean. "Plan on self-insuring for the small stuff," he said.

If a family does suffer a major calamity and has to file a claim on its homeowners policy, the trauma and shock can often be overwhelming. If a claim is particularly large or complicated, or the homeowner is unable to handle the extensive work required to catalog his or her losses, hiring a public insurance adjuster might help.

The Rosenblooms found that hiring an adjuster to represent them helped ease stress and speeded up the difficult process. "They were invaluable in helping us get on our feet," Oscar Rosenbloom said. "You're not completely on your own."
A public adjuster will examine his clients' policy and negotiate a claim directly with the insurance company on their behalf. Ten percent of the claim is a standard fee, according to Grammar. Public adjusters are required to be licensed by the state of California; it is also wise to get a referral and thoroughly check references.

Although both Rosenblooms still vividly remember every detail from the fire, they now know that it is possible to move on after the loss of a home. Although it seems like it at the time, it's not the end of the world, Margaret Rosenbloom said.

"In a year's time, it's going to seem very different," she said. "The insurance provide you the resources to rebuild."

Editorial intern Dana Green can be reached at dgreen@paweekly.com.