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Friends Don't Let Friends Go Underinsured

Karen Reimus is a lawyer and a married mother of two. Karen and her family lost their home and all possessions in the October 2003 Cedar Fire. The firestorm, the largest wildfire in California state history, leveled her suburban San Diego neighborhood. In this blog post, Karen tells her story of underinsurance; in Part 2, she shares gives some hard-won insights on how best to mitigate the threat of natural disasters to your home.

When you say the words "homeowner’s insurance," I think most people’s natural reaction is that their eyes start to glaze over and their hearing starts to fade. And, I can’t say that I blame them, it’s not exactly a glamorous subject. In fact, that most definitely would have been my own reaction before October 26, 2003. On that date, my home and 321 others in the San Diego neighborhood of Scripps Ranch where I live, burned to the ground in California’s largest wildfire, the Cedar Fire.

I do not live in a log cabin on the top of a mountain surrounded by forest, but rather, in a heavily populated suburb located less than two miles from a fire station, a major freeway and an elementary school. In my wildest dream (or nightmare), I could not imagine that wildfire would sweep into my neighborhood and destroy it. But, it did.

So, while you may think a natural disaster will never claim your home, unfortunately, I have to disagree…a natural disaster can hit ANYONE at ANYTIME. While that may sound a bit “doom and gloom”, I make the point for one simple reason, having my home destroyed by wildfire was only the beginning of my troubles. In fact, I have to truly say that I was twice burned…once by the Cedar Fire and the second time by my insurance company.

I, like the majority of my neighbors, was underinsured. What is underinsurance? Underinsurance means that the dollar limits of your homeowner’s insurance policy are not high enough to cover the cost of actually replacing what you lost. I was completely shocked to discover that I was underinsured. I say that I was shocked because I had just purchased a brand new extended replacement homeowner’s insurance policy with one of the nation’s best-known and top-rated insurance companies only four months before the Fire. In fact, I had even purchased the Earthquake Coverage because I wanted to be “extra-covered”. If we had a brand new replacement policy, how could we possibly be underinsured? As I discovered, the answer to that question is that the term replacement actually means replacement subject to the dollar limits contained in your policy.

Underinsurance is a completely counter-intuitive problem. (And, frankly, that’s why MOST people are unknowingly underinsured). If you had asked me before the Cedar Fire about underinsurance, in all candor, I would have told you that I “didn’t get it”. My reasoning would have been that the insurance company wants to sell you as much coverage as possible so that they collect a bigger premium. So, how could there possibly be a problem of underinsurance? (In fact, that is what most people think).

In reality, there is actually a very large incentive to underinsure. An insurance agent doesn’t want to lose your business by quoting you a high premium. So, they quote you a low premium by underinsuring your home. Also, insurance companies want to avoid being overexposed on claims when a natural disaster strikes. Frankly, I wouldn’t have a problem with this if homeowners KNEW that was what was happening. But, if you’re like most people, you rely on your agent to accurately set your homeowner’s insurance policy limits. You never even think to ask the agent if they are lowballing your coverage limits to get your business. But, when it turns out that you are underinsured, the insurance company points the finger at you and claims it was your fault.

So, how do you protect yourself from being underinsured?

  • Go over your policy NOW to make sure that in the event of a total loss, you will have enough insurance money to replace your home.
  • Do not rely exclusively on the advice of your agent to determine whether your policy limits are sufficient.
  • Be proactive. Find out how much it would cost to rebuild your home.
  • There are various programs online that can estimate what it would cost to replace your home.
  • You can also talk to construction professionals in your area to find out the cost of building a custom home with the upgrades you have, (because even if you live in a tract home, the rebuild will be a custom home).

If your research shows that the cost to replace your home is greater than your policy limit, (which is very likely), then ask the agent to adjust your policy limit upward. If they refuse, then at a minimum, ask them to confirm in writing that the numbers they have assigned to your policy limits are adequate to replace your home and belongings. You should also consider shopping around to find another insurance company that will insure your property for its true replacement cost. While this process may seem daunting, time-consuming, scary or all of the above, it is well worth the effort.

The Cedar Fire changed my life in many ways. I became a community leader, a grass roots lobbyist, and joined the staff of a wonderful nonprofit organization called United Policyholders (UP). UP educates consumers about their insurance rights. For more information about insurance issues, including underinsurance, please visit www.unitedpolicyholders.org.

After watching what I went through after the Cedar Fire, friends now regularly ask me to review their homeowner’s insurance policy with them. I’m always happy to oblige because as I love to say to them, “Friends don’t let friends go underinsured!”

She is a contributing author of The Disaster Recovery Handbook and Household Inventory Guide, an essential text on recovering from a natural disaster.

When devastating wildfires again hit San Diego in October 2007, Karen began organizing recovery meetings for fire survivors. Working collaboratively with fellow Cedar Fire Survivors, she developed the “Roadmap to Recovery” meeting series for ’07 Firestorm Survivors. The first Roadmap meeting was held in late November of last year and has continued on a regular basis since that time.

LEAVE A COMMENT Leave Comment  

I'm not a homeowner, but went through the same thing when my car was stolen. After being a loyal client for 20 yrs, I was lowballed by "fair market value." Unlike days gone by, they don't use real ads, they use a computer program. They offered a settlement of $2800 when I priced cars at $4500 - that's a 38% savings for them, asking me to cough up 60% more to buy a car immediately.

Now I carry liability only - if and when I go back to a higher-margin, full-coverage policy, I'm changing insurance companies and will be sure to let them know why and who handled my case.

Insurance for everything in CA is higher, and they're making money hand-over-fist. It's not like we're in hurricane country. After Northridge, they've written earthquake coverage out of the picture by ridiculously high premiums, and I imagine the same now for fire.

I watched SoCal tonight and absolutely disagree with Karen Reimus. I have been an independent insurance agent for over 30 years and I have NEVER seen an insurance company insure a home for less than the replacement value in order to low ball the premium. That is ridiculous. It is quite the opposite. More typically we have to convince the insured that they are not adequately insured and should increase their coverage. Our agency will occasionally send letters to our clients asking them to complete a detailed questionnaire about their home so that we can be sure they are insured properly. We may get a 1% response. I am always trying to find some middle ground between what our client wants to insure their home for and what the company feels it should be insured for. The insured wants to low ball it to keep the premium down.

I get tired of people feeling they hold no responsibility in determining whether or not they have proper insurance. Karen Reimus feels insurance companies should be responsible. If they are held responsible they would have to go to every home they insure and do a complete inspection. Do you know how expensive this would be? Then everyone would complain about their rates when they go up.

Insurance agents have access to computer programs that help determine the replacement cost of homes. Consumers need to sit down with their agent, provide them with all the details of their home and ask that they provide them with a detailed replacement cost calculation - then insure it for the recommended amount. If their agent won't do this for them then find a new agent.

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