Valley Interview : Take Time to Update Homeowners Insurance, Advocate Advises

Buying home insurance, which used to be a pretty simple proposition for most people, has suddenly become complex.

Many homeowners have discovered since last fall’s brush fires and January’s Northridge earthquake that the coverage they had--or thought they had--before those disasters was inadequate. Even people fortunate enough to have escaped serious damage from the recent disasters have heard horror stories about the battles many of their neighbors in the San Fernando Valley are still having with their insurance companies.

All of which makes this a good time for anyone who owns property in this area to review their insurance coverage to see if they need to make changes, says John Trapani, a Northridge accountant.

Trapani knows the importance of the exercise first-hand. The quake caused extensive damage to his home, including several cracks in the foundation.

His contractor estimates that repairs to the 2,700-square-foot, four-bedroom home will cost more than $500,000. Trapani’s insurance company has offered $125,000. Meanwhile, the family is living in a trailer in the front yard.

The frustration of trying to deal with his insurer on his own prompted Trapani and his wife, Kathy, to help organize Community Assisting Recovery (CARe) in Northridge.

The nonprofit consumer group, headquartered at 11145 Tampa Ave. in Northridge, conducts “carrier specific” meetings for people whose homeowners insurance or earthquake coverage are with the same company.

In the midst of his own struggle to rebuild, Trapani spoke with staff writer Jill Bettner last week to share his advice for other homeowners who are reassessing what kind and how much insurance they need.

“I’m not an insurance expert, but I’ve learned a lot since Jan. 17,” he said.

Question: What happens to me if my insurer gets out of the market?

Answer: A lot of companies are either limiting their new business or limiting the types of policies and properties they’ll take on. So the number of choices people have now is extremely small.

One of the problems that generates is if you haven’t settled with your old insurance company to repair your house--and you no longer have insurance--another company won’t come in and cover you until you’ve done the repairs.

It puts you in the position, if you have a company going out of business, of being forced to agree to a settlement that is perhaps unreasonably low, so you can qualify for insurance with another carrier.

Q: How do I find another carrier?

A: Go through the Yellow Pages and make a list of all the various agents. Then start calling and interviewing them to find out whether they have a product that’s available.

If they do, ask them if they’ll make a copy of the policy available to you before you sign.

Believe it or not, that’s not routine. It’s like ordering a new car and three weeks later, you expect to get a station wagon and end up with a Yugo.

Q: What if I haven’t repaired quake damage yet?

A: I understand there are a few insurance companies that are writing policies based on the condition of the house as it stands.

That gets very risky for the homeowner, though. If we have another earthquake before the house is repaired, who’s to say when new damage occurred?

If a person can find an insurance company to insure on that basis, I’d recommend making a detailed list of what the condition of the house is now.

Get the best policy you can. Then once you get the repairs done, that will open up other possibilities.

Q: How do I figure the kind and amount of insurance I need?

A: People should be aware on a general basis of the various types of policies that are out there.

There are policies with coverage limits, then there are policies with guaranteed replacement costs. Even there, though, you have to be careful there isn’t some fine print back on page 47 that could take away that guarantee.

And you have to remember that the market value of the house probably has nothing to do with the replacement cost of the house. Replacement cost is what it will cost to return the house to its pre-quake condition.

Unfortunately, in this area even if you do everything exactly right, you can still be out quite a bit of money because of the high deductibles on earthquake insurance. No other insurance I know of has such high deductibles.

For example, say a person bought a 2,000-square-foot house 20 years ago for $100,000. Before the quake, figuring it might take $100 a square foot to replace, the homeowner might have had $200,000 of homeowners coverage. In addition, he might have had $200,000 of earthquake coverage.

This person is probably still not in good shape now. If the quake caused extensive damage, the homeowner could easily have a loss of $300,000 or $400,000.

But say the deductible on his earthquake insurance was $40,000, or 10% of the $400,000. If this person had a $400,000 loss, he’s still out of pocket $40,000.

In effect, this person did everything he could. But unfortunately in this area, even if you do everything exactly perfect, you can still be out a lot of money. That’s one of the difficult aspects of earthquake insurance.

It’s important that people take a detailed inventory of what is in their house now and find out what the replacement cost of those items would be. Then they should maintain a detailed inventory to be sure they have adequate coverage.

Q: Do I need less coverage because real estate prices have declined?

A: It’s important for people not to confuse the market value of their property with the cost of replacing it if they have a claim.

Replacement cost is what it would cost to return the house to its pre-existing condition. That could be very different from the market value. Today, most houses would cost more to replace than they could be sold for.

And earthquake damage can be surprisingly expensive.

We’re talking about a lot of hand work to remove and reset damaged items--take plaster off the wall, strengthen fastenings between the studs and framing--all things that have to be done before you can start putting new drywall on wall. There’s a lot of preparation, a lot of demolition.

That’s not even counting special aspects of your home, such as wallpaper, upgraded moldings, rugs, hardwood floors underneath the rugs. If the hardwood floor is uneven, you may have to remove the floor to fix the substructure.

In fact, if only 80% of a person’s house was damaged by the earthquake, he should consider increasing the size of his policy.

Q: What kind of coverage is best?

A: There are lots of things that aren’t always covered in a policy like paying to bring the house up to current building code, paying for any engineers, architects, building permits.

One of the most overlooked items is additional living expense. In the current situation, here we are six months out from the earthquake and people are still waiting to get settlements from their insurance companies--living in rented houses, trailers.

Even if they were able to settle today, depending on their damage, they could still be out of their house anywhere from three months to a year.

Most additional living coverage under earthquake policies only goes out one year. Under homeowners, it’s usually the same period, but some policies do go out as much as two years.

The dollar amount is usually enough to allow you to maintain the same lifestyle. So, if you had a three-bedroom house with a swimming pool, you can go out and rent a three-bedroom house with a swimming pool in a similar neighborhood.

Some people are doubling up with relatives and their insurance companies are paying the extra cost.

Q: How do I protect my home the next time there is a disaster?

A: Really read your homeowners policy. How many people ever do?

You need to understand your policy. And it’s not necessarily written in such a way you can understand it.

As an accountant, I read a lot of contracts and leases. And there are clauses in my insurance policy I didn’t understand, especially after I had a loss.

‘The market value of the house probably has nothing to do with the replacement cost.’