Many Fire Victims’ Insurance Falls Short : O.C. recovery: Unless homeowners have special coverage, firms won’t pay for upgrades to meet stiffer building codes.

Reeling from the loss of their homes in last week’s inferno, many Laguna Beach property owners have now learned that their homeowners insurance doesn’t completely cover the cost of rebuilding.

Laguna Beach is filled with hundreds of older homes built on steep hillsides long before building codes required extensive geological surveys, bedrock-secure foundations and other expensive measures designed to protect them from earthquakes and mudslides.

Many were built before building codes mandated double-pane windows, insulation, special electrical wiring, fire-retardant roofing and other improvements.

Without the proper insurance to cover the cost of building to today’s standards, some homeowners could be forced to pay tens of thousands of dollars to upgrade their homes.

“The position of the insurance industry is that they don’t build up to current codes,” said City Manager Kenneth C. Frank, whose insurance will not completely cover what it will cost to rebuild his 25-year-old home, which burned in the fire.

“They will only replace exactly what was there,” Frank said. “As a homeowner, that was a surprise to me.”

Dozens of property owners have been meeting with their insurance agents over the last few days to find out how much money is available for temporary living quarters, how long it will take to get their homes rebuilt and whether they have enough insurance to get a new home back in place.

On Wednesday night, about 80 people jammed a meeting of Farmers Insurance policyholders in Laguna Beach. Some, like Cort Kloke, questioned the basics of their policies.

Kloke, a mortgage broker who lost his home in Mystic Hills, said he guessed that rebuilding his home up to new standards would cost 30% above his home’s value and that his insurance won’t cover the extra expense.

After the fire in Oakland two years ago prompted questions about inadequate insurance policies, Kloke said he called Farmers and was told the extra coverage wasn’t available. Now he’s stuck.

“I think the people who make the biggest fuss may come out OK, but they will exploit the uninformed, the naive and the unprepared,” Kloke said. “I think this is simple misrepresentation in what is supposed to be a consumer protection era.”

Even those who purchased top-of-the-line insurance that guarantees replacement of a fire-devastated home--no matter the cost--are learning that what it takes to pay for extras is usually excluded.

Typically, homeowner insurance policies don’t cover the costs of rebuilding to current codes, insurance industry officials say, unless the homeowner buys an extra “endorsement.”

“It is not routinely written on homeowners’ policies,” said Richard Clemson, a senior insurance claims officer with the California Department of Insurance. “I don’t know why not.”

Since July, however, insurance agents in California have been required to disclose to new homeowners and to those renewing insurance the availability of insurance that includes coverage of upgrades mandated in new building codes.

Legislation making the disclosure mandatory was approved in the wake of the Oakland hills fire of October, 1991, when many burned-out homeowners complained that they never knew code upgrade coverage was available, Clemson said. Now, he said, “if you are dealing with a company that offers it, they have to tell you.”

In the Oakland hills fire, he said, most insurance companies at the urging of the state ultimately agreed to pay for code upgrades. He said the Department of Insurance similarly may intervene to help the people of Laguna Beach.

But state Insurance Department spokesman Bill Schultz said the department would be careful not to place an inordinate financial burden on the insurers. “Equally important to protecting the interests of the consumers,” he said, “is to safeguard the financial solvency of the companies.”

Laguna Beach Mayor Lida Lenny said she is prepared to hold the insurance companies’ “feet to the fire” on the code issue by having the city play a strong advocate role for residents seeking to rebuild.

State Sen. Art Torres (D-Los Angeles), chairman of the state Senate Insurance Committee, said he is in the process of making code upgrades a required component of all homeowner insurance policies in California.

Policies that now guarantee home replacement in a fire are “misleading to the public,” he said. “These policies should be written in plain, understandable English and they are not.”

Laguna Beach Councilman Robert F. Gentry, who lost two houses in the fire, said: “I think it’s going to affect almost every property owner who has had a total loss. It could change our community. If people cannot replace their homes, they will have to go elsewhere.”

The lack of code upgrade insurance will be “devastating” for him personally, Gentry said.

Until the fire, he said, he never knew that kind of coverage existed.

“I thought I bought replacement insurance. It didn’t say replacement--except for the foundation.”

Ina De Long, president of United Policyholders Inc., a consumer advocacy group based in Oakland, said the Laguna beach fire victims “need to organize and fight back.

“A homeowner policy is (designed) to put you back to where you were in the event of a loss,” she said. “But when a carrier sells you a policy without code upgrade coverage, they know you can’t go back to where you were. It’s impossible and they know it.”

De Long said insurance companies “aren’t anxious” to sell insurance covering upgrades to building codes because they “can’t control what city and county building departments will require and so they have difficulty rating it.”

State Farm officials said a homeowner can buy extra coverage for new building codes if they pay about 10% over the policy premium. The extra money buys an extra 50% of coverage.

“So if you had a $100,000 policy, it would give you an extra $50,000 for code compliance,” a State Farm claims officer explained.

While State Farm said this additional coverage is considered relatively pricey, De Long said, “if you really need it and have an older home, it is very inexpensive, especially in California, which is earthquake country, and meeting newer codes for foundations can cost $80,000 to $100,000 on a hillside.”

If the Oakland experience is any indication, De Long said, the extent to which insurance companies will bend to help fire victims without the extra insurance will vary and depend on what political pressures are brought to bear.

Rock Jenkins, spokesman for State Farm, said his company may pay for code changes that are relatively inexpensive such as changes in electrical wiring, plumbing and roofs. But he said it would draw the line at expensive foundation work.

Farmers Insurance, which insures owners of 92 homes destroyed in Laguna Beach, is standing pat.

“At this point we are not planning on paying for code upgrades” unless the policyholder has purchased extra coverage, said Jeff Beyer, vice president of public relations for Farmers Insurance Group.

Beyer added, however, that Farmers plans to amend its basic homeowners policy to include code upgrades.

Upgrading to code could have a major impact on the rebuilding in Laguna Beach, said City Manager Frank and local real estate officials. They noted the age of the homes in Mystic Hills and in Laguna Canyon, where some houses were built as beach cottages with single-wall construction.

“I would say any but the most recent houses are going to be subject to newer codes in some manner,” said Mark Singer, a prominent Laguna Beach architect.

Exactly how much money underinsured fire victims may be forced to pay out of pocket has yet to be determined. Federal Emergency Management Administration officials said they will offer low-interest loans of up to $120,000 to help homeowners rebuild.

But Barton Long, 60, a systems engineering consultant who lost his home of 20 years on Skyline Drive, said: “Many people in the neighborhood are in retirement or getting toward retirement and their major investment is their home. If they had to go into major debt, it would create a substantial hardship.”