Market Commentary: Fall 2021 - Homeowner's Insurance

Oct 20, 2021 Willow Creek Wealth Management Posted in Articles, Market Commentary

Homeowner’s insurance is one of those topics that garner little interest from most people. Copies of declaration pages and notices from insurance companies often sit unread or barely glanced at until times of need. The details are dry, and the numbers and terms used are a challenge to understand. For most, it is more a hope that it will all work out rather than having a solid sense of what is covered (and just as important, what is not covered). But in the aftermath of the many devastating fires across California and elsewhere and with the threat of more to come, it is has become imperative that knowing what coverage you have is a crucial component of your broader financial plan. After all, a good homeowner's policy protects what is often our most valuable single asset, and without the proper coverage, the financial loss from a disaster could be devastating. We recommend that you have an in-depth discussion about your current policy coverages with your Financial Advisor and your insurance company or agent. Are your policies up to date? And do they reflect the current actual cost to replace your home in the event of a catastrophic loss? These are the areas to look at and discuss with your insurance company.

Dwelling Coverage

This is the cornerstone of the insurance policy and pays for repair or rebuilding of your home (less the land and excluding damage by notable "unnamed" disasters, such as flood or earthquake) and should be reviewed upon making improvements or every few years as costs rise. Ensure that your agent knows about any special features to the home, such as fine woodwork, crown molding, granite countertops, etc. Make sure your agent agrees that the amount you are covered for under this part of the policy is enough to rebuild your home given current costs. The amount of dwelling coverage you have also determines the amount of protection you get in other areas of your home.

Enhanced Dwelling Coverage (Extended Replacement Cost)

Most insurers offer extra coverage for your home structure if your dwelling limits aren't enough or there is a spike in construction costs like we saw after the recent fires. Policies typically cover 25% of the dwelling coverage dollar amount, but we recommend at least 50% (if not 100%). This coverage is so important because it is difficult to determine ahead of time what the true replacement cost of a home will be.

Additional Structures

This is the coverage of structures on your property that are not attached to the home, including garages, decks, pool cabanas, in-law units, etc. Policies usually cover 10% - 20% of the dwelling coverage dollar amount, but additional protection can be purchased if this amount is not enough. Make sure your agent is aware of these structures and that their values are fully accounted for.

Code Upgrades

This is additional insurance on top of the dwelling coverage and pays for the cost to bring a home up to current construction codes (e.g., to pay for the extra cost to rebuild a 1950s home to current engineering and safety standards) These factors can add significantly to the overall cost of repairing or rebuilding a home. Typical policies cover 25% of the dwelling coverage dollar amount, but we often recommend greater coverage - especially for older homes.

Personal Property

Most policies provide 50% - 70% of the dwelling coverage dollar amount to replace damaged or stolen belongings – everything from furniture to your clothes. Trees and plants may only have minimal coverage, so you should discuss this with your agent if you have elaborate landscaping. Be sure you keep a current inventory of your belongings for claims submissions (photos and videos are a great idea). It is important to have replacement value and not cash value coverage, which can factor in significant depreciation, meaning you will not be reimbursed enough to replace the item.

Loss of Use

Also known as Additional Living Expense, this coverage provides for hotel, rental home, storage costs, etc., while your home is being repaired or rebuilt after a loss. Some policies offer a dollar limit, while others have a time limit (e.g., only pay loss of use claims for one year). It is a key feature of a policy, but little appreciated until needed. Make sure that the coverage pays for comparable housing in your area for a reasonable period. Factor in that rent might be higher than is expected due to a surge in demand after a widespread disaster. In addition, it can take years to get through any building process - given the difficulties of finding a contractor, acquiring building materials, and getting permits approved.

Medical Expenses

This feature allows you to pay medical bills should someone get hurt at your home. Coverage typically ranges from $1,000 to $10,000, is not subject to a deductible, and can be paid regardless of who is at fault. You would use it if your dog bit someone (and can even be used when the accident occurred outside the home). It is meant to stop someone from suing you for a more significant amount and is an often-overlooked feature of a homeowner’s policy.

Liability Coverage

Unlike medical expense coverage, this pays you when you are potentially at fault for property damage or personal injury. This will cover your legal defense and pay for the repair or replacement of any damaged property. This liability coverage is additional to any umbrella liability coverage you have (typically, you would apply homeowner's liability coverage to a claim first, and the umbrella would be an extension of that basic amount). Make sure to tell your agent if you have a dog, swimming pool, trampoline, or rambunctious teenager – any factor that could indicate a higher risk of accident or injury.

A Few Other Things to Think About

Earthquake and flood insurance require separate policies. Homeowner's insurance does not cover damage from floods or earthquakes, and these perils require separate, standalone policies. Maps of areas prone to catastrophic loss caused by these events are updated all the time. Know your risk related to them and discuss options for coverage with your agent. Always pay your homeowner’s bill on time. In high-risk areas (such as in wildfire-prone California), insurers have been known to cancel after one late payment, and they will not reinstate. In markets where the availability of homeowner's insurance is limited, this simple mistake can have devastating consequences. With this year's wildfire danger at an all-time high, all of us must be prepared for a challenging fire season. Check on your policies, update as needed, and know your rights (the California Department of Insurance recently released a bulletin that provides new protections for victims of wildfires and other widespread disasters). If you encounter any roadblocks with your insurer, reach out to an attorney or other trusted advisor. And, as always, we can be an excellent resource for any questions you might have on your policy or future insurance-related issues.