Home Insurance 101 (From Someone Who Lost His Home)

[Today’s post is from Dads, Dollars, Debts, a cardiologist blogger who is currently between his former job in California and his new job in his home state of Tennessee. As many of you many be aware, DDD lost his home in California during the Tubbs Fire in October 2017. When it comes to things like home insurance, we become experts pretty quickly when we need it. Therefore, DDD is a perfect person to guide us through the basics of a home insurance policy. This post previously ran on DDD’s blog in May 2018. -WSP]

As many of you know, I lost my home in the Tubb’s Fire. At that time I knew the general types of insurance policies I should have but that was about it. I knew I needed term life, disability, auto, malpractice with tail, and home insurance. Pretty straightforward.

So I was covered, but I had never taken the time to read or understand my policies. I had a general understanding of the amount I was covered for if I died or became disabled, but not what else may or may not be covered. This was particularly true with my home policy.

When I bought my home 11 months before the Tubb’s Fire, I trusted my insurance agent to get me the policy I needed. I received the Declaration page, looked at the amounts, and signed. It seemed like a good deal, but I truly had no clue what I was covered for. That all changed October 9th.

I left my house at 2:30 AM. By 4 AM, when the alarm company called and informed me my heat and smoke alarm was going off in the attic. I realized my home was likely gone and called the insurance company first thing in the morning. I reported that my home likely burned down and started figuring out what was what.

Today I am going to lay out a primer for reading and understanding your home insurance policy. So here we go!

Home insurance 101!

If you look at your Declarations page you will see a few things. Section 1 is where we will focus for now. Section 1 is broken down into 6 different buckets:

1. Dwelling
2. Other Structures
3. Personal Property
4. Loss of Use
5. Personal Liability
6. Medical Pay Each Person

Let’s go through each out these in some detail.

Coverage A: Dwelling  

This is the most important amount of your coverage as Coverage A dictates how much you will be paid to rebuild your home. It also sets the amount you will be paid for coverage B and C.

What does Coverage A pay for? Everything that is part of your home. Think of it this way, if you took your home and turned it upside down, anything that doesn’t fall out is covered. Faucets, built in appliances (refrigerator or ovens), floors, fixtures, and cabinetry. All of that is covered.

Once the damage occurs, the insurance company will assess the damage and construct an estimate of how much it will cost to fix or rebuild the home. If your kitchen burns down, they will calculate what that costs to fix. With a total loss, they calculated the cost to build the entire home. From trees to the tile in the bathroom. All of it was accounted for. 

The insurance company wants to adequately ensure the home, but at the end of the day, it is your job to make sure you are covered. When we bought our home, the insurance initially insured us for X (let’s say $500,000), but then sent out a person to assess our home. They took pictures, walked the property, pulled comparative home sales and then gave us an estimate of what coverage we should have. The total the assessor came up with was actually higher than what we were initially insured for. The insurance company increased our coverage and for a slightly higher premium.

Coverage A Riders

Beyond the basic Coverage A, there are insurance riders you can purchase. For instance, we bought a rider that covers 125% of our dwelling. This means in the case of a loss, the insurance company will pay up to a 125% of our limit. In this example it would be $625,000 ($500,000 * 1.25). There are riders out there for 150%, 200%, and also “Guaranteed replacement cost”. Of all of these, the Guaranteed replacement cost rider is the most powerful, because the insurance company will pay the total it costs to rebuild the house.

Once the policy is set, I would recommend revisiting with the insurance company annually or if there are major home renovations (say a kitchen or bathroom) to increase your Coverage. A This way you will be adequately covered even if you are living in your home for 10 years. There are individuals I know who had never increased there Coverage A limit despite living in the home for 10 to 15 years, and they are definitely underinsured.

Coverage B: Other structures

This coverage is for external structures such as sheds, fences, gazebos, outdoor kitchens, etc. Typically the dollar amount is 10% of your Coverage A limit. For our example it would be $50,000 ($500,000 * 0.1). In some states, if the external structure (like a wooden deck) is touching the home then it is covered under Coverage A and not Coverage B. This is important to understand because it affects how much money you may eventually receive. 

California appears to be more consumer protective and thus patios, decks, external kitchens etc. are considered “Other structures”. 

Coverage C: Personal property

Coverage C for all of the items you lost. All of the things that would fall out of the house when we hypothetically flip it over. Computers, clothes, CDs, kitchen supplies…whatever you can think of. I even itemized Q tips under this category.

Typically the Coverage C is a percent of Coverage A. In our case, it is 60% of Coverage A which I think this is fairly standard. If Coverage A is $500,000, then our coverage C limit is $300,000 ($500,000 * 0.6).

How do you prove what you had? Photos help. As do receipts. The insurance company will expect you to itemize each possession, the year purchased, and the condition. We ended up with a list of 2,290 items. It seems like a lot, but when you start systematically going room by room you will be surprised how many things you own. This list will then be aggregated and a total value is reached. This value will then be depreciated by the age and quality of the product.

So even if you had $300,000 in possessions, your value may get decreased to $200,000 which the insurance company pays out immediately. The other $100,000 will be paid out as you purchase the items and submit the receipts. This is called “Replacement Value Coverage”. If you have an “Actual Cash Value” policy then they may only pay the depreciated cost and you are stuck with the difference.

Replacement Value

This is a good time to discuss the difference between “Actual Cash Value” and “Replacement Value Coverage”. You want a coverage that has “Replacement Value Coverage” as it will pay the price of the item if you purchased it new.

Those 20-year-old jeans will be worth the $70 you would need to buy them now, not the $10 they are probably worth. Those CD’s will be $20 each instead of the $2.99 that they may actually be worth. So please look at your policy and make sure it is Replacement Value Coverage. If not, call your insurer and have it changed. You do not want to be stuck with the depreciated value of your items.   

Taxes

It is worth going through the itemization process because you will need it for tax purposes. It is painful and I know plenty of people who have not yet completed their lists 8 months later. If you lost more items then the insurance company reimburses you for, then you have a potential tax right off! More on that in a future post.

Show me the money!

If there is a section of the Insurance Policy that is going to become disposable (or investable income later) it is the Possessions payout. While the insurance company pays you for everything you accumulated over your lifetime, you are unlikely to replace everything again. I doubt I am going to by any CDs, all those jeans, old trinkets, or the 100 t-shirts I lost.

Plus there are things that you can’t replace and often these are the items that hurt the most. For us, it was the loss of some of our grandparents’ and our son’s items. Sentimental stuff. Still, after replacing the things you want/need and dealing with the trauma and upheaval of losing your home, you can decide what to do with the money.

Coverage D: Loss of use

Coverage D covers your rental, additional commute costs, and possible food costs due to being displaced from your main home. For instance, if there is a kitchen fire and you are out of the home for 1 month while fixing your home, then insurance pays for the rent for that month.

Loss of use typically has a dollar amount maximum, time limit, or both. In our case, we have a time limit of 1 year. However, in the State of California if the loss is due to a declared National Disaster/Emergency by the Federal and State governments than the coverage is extended to 2 years.

So our rent is covered for up to 2 years. If rebuilding takes longer than that then we are on the hook for the additional costs. In our case, I suspect we will have the home built by May 2019. This means insurance has covered 1.5 years of rent. 

So is this rent-free living?

Well kind of. If you have a mortgage on your property, then you have to keep paying that. So, in reality, you are still paying for your home/residence. In my case, I paid off my mortgage in January 2018 with insurance proceeds and will be living rent-free until our rebuild is complete…kind of. In reality, I am taking a new construction loan to build my home. There are many financial reasons for this including lower interest rate, interest-only payments, etc. that I will cover in another post. Either way, the Loss of Use coverage is another financially positive aspect of our policy.

Coverage E: Personal Liability

Coverage E pays out if someone gets harmed on your property and sues. It is a set dollar amount and since we have not had to use it, I have not researched it further. I suspect it is like liability insurance on your car and provides coverage to a said dollar amount. After that, I hope you have an umbrella policy to cover any overages.

Coverage F: Medical Pay Each Person  

Coverage F covers the medical expenses of each person harmed on your property. There is a set dollar limit. I am very grateful we have not had to use this coverage. We all made it out safe and sound thanks to some guardian angels (a mom and her teenage boy) who knocked at 2:30 AM, and my dog who started barking when they knocked, setting off the evacuation.

Building code upgrades:

This coverage pays for any cost incurred to comply with City/County/State required upgrades that have changed since the house was built. This may include improved windows, electrical components, etc. Since our home was built 20 years ago, we have quite a few items that will fall into this category allowing for an even higher payout from the insurance company. In our case, we are covered at 20% of the Coverage A limit or $100,000 in our example ($500,000 * 0.20).

Here is an example of items that will fall under the Code Upgrade from the City of Santa Rosa. As you can see, there are some things like Landscape Architect and Soil Engineer that I would not have considered as Code Upgrades! 

Debris removal

Debris removal is another coverage on top of those above. For us, it is 5% of our coverage A limit. This pays for costs associated with clean up before building. Basically, we used this money to remove the home debris and all of the dead trees (so many dead trees). In our current example it would be $25,000 ($500,000 * 0.05).

Landscaping

This covers trees, shrubs, etc. that you are looking to plant once you have rebuilt. For us, it is 5% of our Coverage A limit. In our current example it would be $25,000 ($500,000 * 0.05). Additionally, there are limits on how much insurance will pay per tree. When figuring this amount out you will need to count how many trees and shrubs you had to identify how much will be paid.

Additional Riders

There are a lot of other riders out there. These are noted at the bottom of the declarations page on the right-hand column. Some are useful and some are not. For instance, I had no clue Identity fraud was covered by my home policy.

One useful rider worth considering is the “ the Guaranteed Replacement Cost” rider I mentioned above. This pays out the entire build for your home irrespective of cost. At the minimum, I would get 150% to 200% “Extender Replacement Cost”. For the additional $30 to $60 a year you could save lots of money in the case of a catastrophe. And catastrophes are the main reason we insure.

I would recommend everyone call their insurance company and get the full policy document (about 75 to 100 pages) and go through it. It is worth the hour or so of your life and may save you thousands to hundreds of thousands later on.

Costs

I am actually surprised how cheap good home Insurance can be. My annual premium was $1,388 with a $1,500 deductible for a policy that will likely end up paying over $2 million dollars between loss of use, dwelling, and personal property when it is all said and done. Not a bad return on investment for $3,000 and one of the only times owning a McMansion may be financially beneficial.

Conclusions

I hope this was a good primer for everyone. Insurance is one of those things you want to set and forget (similar to index fund investing). So keep it simple and ensure well for the things that are life altering such as death, disability, and a loss of a home.

Don’t spend the $100 for the iPhone insurance. Spend it on getting a great home policy. Take the time to review your policy this week and then annually you can consider increasing the coverage. Through our tragedy, we have fast-forwarded our financial plans/life by 10 years easily. A silver lining and possible because we were well insured. So a big thank you to our insurance agent.