In seeing firsthand the recent Marshall fire that completely destroyed over 1000 homes in Boulder County and left smoke and wind damage for thousands more, many homeowners in this county and in many other disaster areas are finding that that the potential for catastrophic loss (especially from climate/weather related events) is much higher than perhaps previously believed and for those unfortunately impacted they are finding that they are often underinsured when it comes to protecting against complete loss of property. According to a survey by United Policyholder, a national nonprofit consumer advocacy group based in California, about two-thirds of fire victims are generally underinsured. A survey of people affected by wildfires in 2020 in Colorado’s Grand and Larimer counties found shortages often in the hundreds of thousands of dollars and initial surveys of the Marshall fire are showing similar coverage shortages. Homeowners need to carefully assess the need to update their homeowners insurance to protect against loss or damage of property.
If wanting to fully protect against total loss, your goal with your homeowners insurance should be to provide you with enough funds to rebuild your home if it were destroyed (e.g., replacement cost), which can exceed market value based on rising building costs, especially after a large fire or flood event. For example, authorities in Boulder County have told residents that the cost to rebuild from the ground will likely cost at least $320 per square foot, much more than many residents have set in their insurance plans. To find out the building rates in your area, consult your local builders association or a reputable builder. You should also check with your insurance agent or company representative. Homeowners insurance also covers your family’s possessions and provides you with compensation for liability claims, medical expenses, and other expenditures that result from property damage and bodily injury suffered by others.
Although policies vary, a typical policy covers damage to property caused by fire and lightning, windstorm and hail, explosions, theft or vandalism, vehicles, smoke, falling objects, weight of ice and snow, freezing of plumbing and heating systems. But be aware that homeowners insurance does not cover a wide variety of perils (e.g., flood, earthquake damage). You may need to purchase an endorsement or separate insurance policy to ensure adequate coverage in these instances. Most people buy flood insurance policies through the National Flood Insurance Program, sold by FEMA-approved flood insurance providers like Allstate and Liberty Mutual. Private flood insurance companies may also offer more comprehensive coverage. Keep in mind that some perils such as foundation damage due to soil expansion/contraction are not able to be covered and early detection/mitigation is key to not having a major out of pocket expense related to your foundation.
When reimbursing you for a loss after a deductible is met, insurance companies use one of two methods to determine the value of property:
- Replacement cost: This pays you the cost of replacing damaged property, with no deduction for depreciation, but with a maximum dollar amount.
- Actual cash value: This pays you an amount equal to the replacement value of damaged property minus a depreciation allowance for age and use.
Here are a few things to keep in mind when you’re insuring your personal belongings:
- Check the limits of your policy on personal items, such as jewelry, silverware, and computer equipment. If the limits are too low, consider buying a special personal property endorsement or a “floater.” An endorsement is an addition to your policy. A floater is a form of insurance that allows you to insure valuable items separately.
- Make an inventory listing of everything you own in your home and in other buildings on the property. Write down major items you own along with all available information, such as (a) serial numbers (b) make and/or model numbers (c) purchase prices (d) date of purchase. Without the creation of a detailed inventory list to support a claim many fire survivors are finding out that their insurance company will only pay out a certain percentage (e.g., 30% minimum required with current law in CO) of the contents coverage, which is often stated to be 50% or higher of the value of the home. Make sure to update your listing with major improvements.
- Document your inventory. Take either still or video pictures and attach receipts to the inventory list when available. Store the inventory and visual records along with other import records (e.g., birth certificates, auto/home titles, passports, etc.) away from the house and/or in a fireproof safe.
- Consider additional endorsements such as an extended/guaranteed replacement and/or an inflation guard that provides additional protection as your need for increased coverage likely grows with inflation. This may be especially important if you decide to insure for less than 100% of the replacement cost to save on premiums. If making major improvements, you may need to also increase your base coverage. A few companies offer a cash settlement option that will pay out an agreed to amount no matter if you rebuild in place or not, in which case one might decide to clean up the lot and offer it for resale.
- Install safety & security devices. You can often save up to 15 percent on you premium with deadbolt locks, fire extinguishers, smoke alarms, burglar alarms and fire alarms that alert your local police and fire stations. Check with your agent to see if your insurance company has specific requirements to qualify.
- Increase the deductible on your homeowners policy. Increasing your out-of-pocket payment from say $1,000 to at least $2,000 can save you money on your premium and it will discourage you from making small claims, which could put you at risk for being non-renewed.
- Check into a multi-policy discount. Some companies offer a price break for having more than one type of policy with the same company.
- Maintain good credit. Many companies provide discounts or consider good credit as one of the factors when selling new policies, so it can really pay off to manage your personal finances.
It pays to shop around for insurance coverage. Keep in mind that the cheapest policy is not necessarily the best. Selecting a company that provides good customer service and one that fits your personal needs is critical, especially when it comes time to file a claim. You can learn more about what to look for and how to compare companies in your area by referring to state and local insurance commissions/associations (e.g., Rocky Mountain Insurance Information Association) and websites that can review all insurance companies on a regional basis. (e.g., Moneygeek).
Peak Asset Management, LLC is an SEC registered investment adviser. This is not an offer to buy or sell securities. Past performance is not indicative of current or future performance and is not a guarantee. The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.
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