You had a fire and the home is a total loss. Over the years, you have spent tens of thousands of dollars on furniture, furnishings and other household items. You have spent similar amounts on clothing, jewelry, toys and other personal items. The insurance company is willing to pay you $12,000 for all your stuff and you feel cheated. What are your options? What can you do?
Before we talk about what to do after the loss, we are going to discuss some things to do before the loss. The first thing that you should do is look at your homeowners insurance. What does it cover and for how much? Most people I talk to about their homeowners insurance haven’t looked at their policy in years. They just get the bill and pay it.
Is the replacement value listed enough to rebuild your home after a total loss at today’s building costs. Are your outbuildings covered? If your home is in your trust, is your trust listed as an additional insured. If not, then that may be a reason for the insurance company to deny a claim.
Three homeowners insurance coverages that I see are much misunderstood by policyholders are replacement cost, possessions, and water damage. If you do not have replacement cost coverage, when you have a loss, you are typically paid the actual cash value, sometimes called fair market value, of the item lost. Some insurance companies will “depreciate” the item depending on the age of the item lost. This depreciation, of course, reduces the amount that the insurance company will pay you.
For example, let’s say you had an 1800 square foot home worth $120,000 and you had a total loss. If the vacant lot was worth $15,000, you would be paid $105,000 from the insurance company. If you took that amount and tried to rebuild the home, you would not get very far. At $10,000-$20,000 in demolition costs and $150 per square foot to rebuild, you would be looking at a bill of $280,000-$290,000. You would be about $175,000-$185,000 short. Not a good result.
On the other hand, if you had sufficient replacement cost coverage, you could rebuild the entire home. You do however, have to pay an extra premium for that replacement cost coverage. And the insurance company usually will not just cut you a check for the full replacement cost amount.
Most insurance companies will initially cut you a check for the actual cash value, but will not pay any amounts over that until you provide them with receipts that you have expenses for the replacements over and above the actual cash value.
Possessions claims I find have been particularly difficult for homeowners. Many homeowners insurance policies will not cover antique value, jewelry or collectibles without a specific rider. Grandma’s 150 year old walnut dresser could be valued as a used dresser at $150, instead of its antique value of $2,500.
Documenting that they owned a particular possession is a challenge that many homeowners find that they come up short. After such a traumatic loss, not only is it tough to remember everything you owned, you have to present and prove to the insurance company’s satisfaction for each item that you did have that loss.
The best way to document a loss is before you have a loss. You probably have a cell phone; take pictures or videos of every room in your home, of open cupboards and closets, of collectibles, of toys and electronics. Prepare an inventory of items in every room. If you have jewelry, antiques or collectibles, you may want to have an appraiser value them all.
When do make lists, take pictures and videos or get appraisals, do not keep your only copy in the home, only to be destroyed in a fire. Keep backup copies in the cloud, in a bank safe deposit box or other location outside the home. They will be invaluable in the event of a loss.
If the loss is water damage, many homeowners are surprised by lack of coverage. I have seen many insurance policies exclude water damage as a non-covered loss or exclusion in the policy. I have seen some policies cover water damage in the event of a storm when the roof is damaged, but not if the sewer backs up or a pipe bursts.
Other policies I have seen limit the loss recovery to a specific dollar amount such as $5,000. If you have ever had a pipe burst or a sewer back up, $5,000 does not go very far. Review your policy and make sure that you have water damage coverage. Review your exclusions and if you need coverage for any of the exclusions, get a rider or get a new policy.
At the time of a covered loss, be wary of any insurance company willing to offer you a quick payout. These are typically lowball amounts. Oftentimes, you still have not tallied all of your losses. I have seen more than one homeowner take a quick settlement and sign off with the insurance company, and not too long afterward discover many other items for which they did not file a claim with the insurance company.
The insurance companies’ adjusters do this type of claims work every day, you don’t. The adjusters know what they can expect from the homeowner and what they can usually get away with. I have seen on more than one occasion, when the insurance company holds the payout of the claim hostage unless the homeowner agrees to release the insurance company from any further obligations.
It often makes sense to hire your own adjuster to represent you against the insurance company’s adjuster. It levels the playing field. Your private adjuster’s fees are usually based upon a percentage of the recovery from the insurance company. Everyone I have talked to who had a private adjuster swear by them and say that they would never go through an insurance loss without their own private adjuster.
By doing a little homework ahead of time before a loss can save you thousands or tens of thousands of dollars recovered in the event of a loss. Verify and obtain adequate coverages. Document what you own. And if you never have a loss, there will be great documentation of your stuff when it comes time to go through it after you are gone. Your loved ones will thank you. Make sure that you are properly protected.
By: Matthew M. Wallace, CPA, JD
Published edited August 16, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Protect yourself from insurance loss