Insured? Are You Sure? : How to make certain you are adequately covered: know your policy and available options

A hot June afternoon two years ago marked the beginning of a nightmare for Dan and Barbara Leimeters of Glendale.

First they lost their home to a brush fire. Then they learned that the amount of their homeowner’s insurance policy and the automatic annual increases weren’t enough to rebuild their house.

“We were covered for only about half to two-thirds of what we lost,” said Dan Leimeters.

Industry experts say the Leimeters’ ordeal is all too common among homeowners who suffer property losses. Making certain that you are adequately covered requires understanding your policy fully, reviewing it regularly and making changes as necessary.

The Leimeters are finally recovering from their experience, but the losses suffered and lessons learned from the worst fire in Glendale history are seared in their memories.

It all started about 3:30 p.m. when Barbara Leimeters left her job as an office coordinator at Verdugo Hills Hospital, drove onto the freeway and saw smoke coming from the direction of her Glenmore Canyon home.

“I knew it was close, but I didn’t know exactly where,” she recalled. “So I was rushing home just in case, to get stuff out of the house.”

By the time she got to the base of her hillside property, she saw flames racing uphill devouring the dry brush.

Frantically, she sped up the steeply banked driveway to her house where she turned on yard and roof sprinklers, picked up a hose and began spraying the flames that were dancing along the branches of her trees.

Within moments, however, the water pressure fell to zero and Leimeters found herself trapped in dense, dark smoke that made escape seem impossible.

Just as all appeared lost, a police car carrying some of her neighbors drove onto her property and whisked her to safety.

When she returned after the fire with her husband, Dan, they found nothing left of their home but the chimney.

That, however, didn’t come as much of a surprise, considering the intensity and magnitude of the wind-driven blaze of the so-called College Hills fire. It destroyed or damaged 64 houses and caused about $19 million in damage.

But finding out about their policy shortfall came as quite a shock.

After making their insurance claim, the couple learned that despite automatic increases of their coverage amount each year by their insurance company, their 1,800-square-foot house was insured for $70,000 less than it would cost to replace it. And what’s more, they say, their content coverage didn’t come close to paying for their belongings, which included expensive designer furniture they bought years ago and an extensive Jack Benny library of books and recordings.

“There are many cases where the insurance industry used incorrect figures to determine rebuilding costs,” said Richard Clemson, a supervising insurance claims officer with the California Department of Insurance. “So you really need to sit down with your insurance agent and go over what’s in your house and what kind of house it is, rather than have him come up with the numbers.”

Determining Amount of Coverage

If your mortgage lender dictates the amount of your policy, your first order of business is making sure your insurance isn’t based on the mortgage balance, as that has no bearing on the cost of replacing your home.

Instead, it should be based only on the cost of replacing the structure, not the foundation or the property, which will remain intact in case of most covered losses, such as fire.

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One way to get an accurate calculation of your house’s structure value is by inviting your insurance agent to your home. That way, the agent can measure it, photograph it and make note of anything that might increase the rebuilding costs, such as a hillside lot.

You may also want to get estimates from several local contractors yourself.

Still, Clemson warns, that doesn’t protect you in all cases. For instance, many homeowners who lost houses in the Oakland Hills fire have also found themselves underinsured, as the high demand for contractors pushed rebuilding costs far higher than expected.

“If a contractor tells you today it will cost $100 a square foot to rebuild your home and you insure it for that, that’s great,” Clemson said. “But if you get into a situation where for some reason contractors are no longer willing to work for $100 a square foot and that’s all you’re insured for, then you’re kind of in a bind.”

Guaranteed Replacement Coverage and Cost Escalators

A simple way to protect yourself is with a so-called guaranteed replacement clause that many larger companies are beginning to offer as part of their basic homeowners policy.

This clause allows the coverage amount to float, so no matter what a contractor may be charging when you lose your home, the insurance company will pay for replacing it, whatever the cost.

If your insurance company doesn’t offer it as part of the standard policy, you can usually add it for very little more each year.

“Some companies (that insured homes destroyed in the Oakland fire) would have added it for $5 a year,” Clemson said.

At the very least, homeowners should consider adding a “cost escalator” to their policies, if it’s not already offered.

This coverage is slightly different from guaranteed replacement, in that the insurance company automatically recalculates your policy based on the annual inflation factor, which presumably would cover most construction-cost increases.

Again, if your policy doesn’t include this, you can usually add it for very little.

Content Coverage

Many homeowners give little thought to their content coverage, which is insurance for personal possessions. However, those who have suffered losses say that can be a costly, emotionally draining mistake.

When considering whether your content coverage is adequate, it’s essential to give thorough thought to all you own.

“You should review your policy at least once a year, to make sure the coverage is in line with the value of the home and the contents,” said Mary Crystal, director of communications for the nonprofit Western Insurance Information Service in Los Angeles. “Say to yourself, ‘OK, if I lost all of this tomorrow, is my content limit sufficient to replace all my possessions and clothing?’ ”

If you find you’re underinsured you can protect yourself by buying additional coverage.

Crystal said it’s important to understand that most policies offer only limited coverage on many items, such as jewelry, silver, stereo and television equipment that have only limited coverage. Many policies, for instance, offer only a basic $200 coverage for computers--barely the price of many software programs.

The amount of content coverage is based on a percentage of the structure value--usually between 70% to 75%. So if your house is insured for $100,000, your content coverage will usually run between $70,000 to $75,000.

Standard policies provide only for the depreciated value of contents, which is about 70% of their original worth.

To get full replacement value for personal items you’ll have to pay extra for a “replacement cost” policy for your contents, which subtracts nothing for depreciation.

Susan and Carl W. Raggio III discovered this the hard way.

Itemizing Your Possessions

Until losing all their possessions in the same College Hills fire that destroyed the Leimeters’ home, the Raggios and their six children gave little thought to taking inventory of their possessions.

Doing so after the fire wasn’t easy.

“We had to picture each room in the house and everything we had in it, the number of socks and nail clippers in drawers, books--everything we had,” Susan Raggio said. “Then we had to list it on these forms, give the cost and how long ago we bought it. Then they gave us the depreciated dollar amount.”

And like the Leimeters, the Raggios found they too were underinsured. They had no additional coverage for valuable heirlooms, including Russian sterling silver from Susan Raggio’s great-grandmother.

“We took a bath on the contents,” Raggio said. “We had a limit of $189,000 on contents and without even listing the clothing, we took a loss of $200,000 over and above what we got from insurance.”

As the Raggios and Leimeters have since learned, one of the best ways to guard against this is itemizing before any loss occurs.

One easy way is by walking through your home with a video camera, remembering to shoot inside closets and drawers. Then, keep the video tape in a safe place away from home along with receipts for purchases whenever possible and appraisals on hard-to-price possessions, such as antiques, artwork and special collections.

But most important is reading your policy closely and determining whether you have adequate coverage.

Clemson said it’s essential to critically review all new purchases annually. For instance, did you redecorate your home and buy new furniture? Did you buy a new computer?

“Maybe a relative passed away and you inherited antiques that you didn’t have a year ago,” he said.

“So when your policy comes in the mail you should at least sit down and give it some critical thought,” Clemson says. “You don’t just want to take the policy and toss it in a shoe box.”

Earthquake Coverage

The many earthquake faults that traverse Southern California routinely call attention to earthquake insurance. But because of the cost and its high deductible, many homeowners bypass it.

Crystal, of the Western Insurance Information Service, said about 20% to 25% of Californians have earthquake insurance. Depending upon the age and type of home you live in--with wood frame being the hardiest in earthquakes and masonry being least desirable--you’ll typically pay anywhere from $3 to $10 for every $1,000 in coverage, Crystal said.

And in addition, the deductible for most policies runs at 10% of your insurance coverage amount--or $10,000 for a house insured for $100,000.

Policy Choices

When choosing a homeowners policy, you’ll have three choices:

The Basic Form is a standard coverage that includes repairing or replacing your house and personal possessions in the event of fire, theft, explosions, riots and an assortment of other losses.

Detached structures on your property, such as patios, fences, decks and contents are also covered.

The policy provides money to maintain your standard of living should you be forced to move out of your house due to a covered loss.

And it provides you with liability coverage in the case of damages or injuries caused by you, a member of your family and even your pets.

The Broad Form includes those losses in the standard policy and a number of others, including falling objects and the weight of ice, snow and sleet.

The Special Policy is the most inclusive and covers the house for all perils except those the policy explicitly excludes.

Buying a Policy

After determining the type of coverage you need, it’s worthwhile to shop around for a policy.

A recent survey by the California Department of Insurance found premiums for identical coverage varying as much as 100% among companies throughout the state.

A good place to start is with friends, family and colleagues. Ask the people you know for recommendations about insurance agents or companies and about their experiences in making claims with a particular company.

When comparing prices, make sure to provide the representative with all pertinent information regarding your house. Discuss your needs for special coverage.

If you want a lower premium, consider increasing your deductible to the most you can afford.

And choose your insurance agent as you would any other professional you pay to represent you.

“If during your business relationship you’re unhappy,” Clemson said, “take your business elsewhere.”

Dan and Barbara Leimeters agree and are taking a lot more into their own hands these days. No longer are they simply trusting someone else to determine their homeowner’s coverage.

Since rebuilding a new, bigger house with help from a 4% federal disaster loan, the couple has taken it upon themselves to check and double-check their coverage amount regularly.

Because the Leimeters’ home is in a fire area, they don’t qualify for guaranteed replacement coverage and must themselves make sure their home is adequately insured.

“We keep pestering our insurance agent to make sure we’re covered enough,” Barbara Leimeters said with a laugh. “Now that we know what the structure of our house is worth, we always check building costs with people who are building homes around us.”

Meanwhile, the Leimeters, like many of their neighbors, are recovering from the devastation that swept through their hillside neighborhood two summers ago. But for years to come, they expect to bear the financial burden of too little insurance.

“We had finally got to the point where everything was fixed up and we didn’t have to worry about it, but now we’re back to penny pinching,” she said. “Things are getting better but we’re on an awful tight budget.”