When California insurance broker Chris Thorndike awoke on Friday morning, he was besieged with an unusual amount of voicemail and inbox messages with the ominous title “Wildfire Updates”. From that moment on, Thorndike, who is President of NorthStar Risk Management & Insurance in Walnut Creek, California worked to help 15 of his clients under mandatory evacuation in the Malibu and Thousand Oaks area understand how their insurance would help them as the fires played out.
Across California, the wildfires have been beyond devastating. With the Camp Fire in the north and the Woolsey Fire in the south, it feels like the entire state of California is burning. But as Californians begin to sift through the ash and rebuild, there may be further dark news coming their way: their insurance might not be sufficient.
“Most homeowners focus on dwelling replacement costs,” says Thorndike. “What’s often overlooked is loss of use coverage. How long will it take to repair or rebuild? Where will we live? What will it cost to rent a home in my community if there’s a catastrophic event like a wildfire?”
The answer for many might be a bit frightening.
What Is Loss of Use?
Loss of Use is a key provision in a homeowner’s policy that provides living expenses to the insured if their home is deemed uninhabitable as the result of a covered peril such as fire or water. It is sometimes called Coverage D and covers expenses including temporary residence, moving costs and transportation among others. In most policies, loss of use is in two parts – additional living expenses and fair rental value – and is limited to a specific time period.
But not all policies are created equal and most homeowners purchase their coverage based on cost, not coverage. So when a fire causes total destruction, the insured might be surprised that temporary living costs are only partially covered. This limitation can create hardships as people try to rebuild and cover those temporary living costs.
Jay Feinman, a professor at Rutgers Law School and Co-Director of the Rutgers Center for Risk and Responsibility, says, “One thing people often misunderstand, and insurers don’t clear up, is how much a policyholder is entitled to.” He notes that “the insured is entitled to ‘maintain their normal standard of living’. That means a three-bedroom house, room for the dog, and other amenities—equivalent to what they had before.”
From a practical standpoint, this means those affected by the fires need to track their receipts and submit them to their insurance company after the expenses are incurred. Most insurance companies provide budget worksheets. Further, part of loss of use is to compensate for additional costs that would not have been incurred but for the loss occurring. For instance, expenses can be submitted for additional commuting expenses or food expenses brought on by the displacement.
Time Is Against Displaced Homeowners
Having a Loss of Use provision isn’t enough. An additional challenge that displaced homeowners face is the time it takes to rebuild. In California, legislators have tried to be proactive on this issue. The current law allows for 24 months of loss of use and starting January 1, 2019, this will increase to 36 months. In comparison, many other states limit loss of use to just 12 months.
While 24 months of coverage seems like a sufficient amount of time, for many it won’t be enough to cover the actual time it takes to rebuild. Most insurance policies do not consider outside influences that can make it hard for displaced homeowners to be efficient with rebuilding. For instance, the rebuilding efforts after the 2017 Napa fires have consistently been challenged by a variety of issues including insurers who are overwhelmed by demand and contractors who are overworked and overbooked.
Further, California has one of the most expensive housing markets in the country. With a steady stream of disasters that has befallen the state, housing in general is at a premium.
“People have the idea that the insurance company is going to come and make it all okay again,” says Amy Bach, Executive Director of United Policyholders, a 501(c)3 that advocates for insureds. “First thing you do is to understand what you are entitled to and your rights. Get your policy and figure out how much your policy entitles you to.”
Bach advocates that displaced homeowners need to budget their loss of use fund appropriately, especially since, as she notes, “it’s hard to build a home in a year.”
How to Protect Against Being Underinsured
There are millions of homeowners in California and across the United States who need to take the right steps to protect themselves in the event of a similar tragedy.
“Unfortunately, this seems to be the new normal in California for really 12 months a year,” notes Thorndike.
First, it is important to have the right agent or broker working with you on your insurance who can walk you through these more nuanced provisions and explain why they may be worth the additional premium cost. It can make a big difference when something catastrophic happens. It isn’t just limited to the California fires as all homeowners nationwide should make sure they have this protection as well.
Bach agrees. She says, “Don’t be pennywise and pound foolish. It’s easy to say but people don’t like to spend on insurance.”
For Thorndike’s clients, they can rest assured that their policies have strong loss of use provisions that has helped them in this crisis. But for those reviewing their policies, he says “My recommendation is to know your Loss of Use coverage limits BEFORE you suffer a loss and make sure you’re comfortable with the coverage provided.”
It can make a world of a difference when trying to recover from unbelievable destruction like the current fires burning through California.