2017 brought deadly and devastating natural disasters across the country. In the Santa Rosa fires alone, over 7,500 structures were destroyed, causing over $12 billion in damage. Many of these homes were underinsured, leaving the residents liable for the difference between their coverage and the actual replacement cost. Because of this, we are recommending our clients review their homeowners insurance policies to ensure they are properly covered in the event of a catastrophe.

The main consideration when analyzing a homeowners insurance policy is the dwelling limit. In the past, some policies came with guaranteed replacement costs meaning the insurance company would replace the full value of your home with no deduction for depreciation, even if you were underinsured. This type of policy was abused by some insurance brokers and resulted in large payouts by the insurance companies after the Oakland Hills fire in 1991. Because of this, guaranteed replacement cost polices are no longer available and you need to make sure you have enough coverage on your home to rebuild it. If you have an old policy, it is important to remember the increased cost of building up to current codes and to include any remodeling you have done. Many mass market insurance companies will offer an extension up to 20%; however, this may not be sufficient if your dwelling limit is too low. For example, if your home is insured for $1M and is destroyed in a fire, the most you can receive from a claim is $1.2M. If the actual replacement cost for your home is $1.5M, you will need to pay $300k out of pocket to rebuild a home of the same value.

You must also consider the loss of use. Many homeowners insurance policies have riders which provide for loss of use for up to 12 months. Building a home can take longer than 12 months and there are often delays in construction. In events where entire neighborhoods need to be rebuilt, such as the Santa Rosa fires, building materials and contractors are in short supply, increasing the overall replacement cost and the time until completion. Residents without unlimited loss of use would have to pay for the cost of staying in a hotel past 12 months until their new home is built.

Some people may not want to rebuild in completely destroyed neighborhoods and may wish to buy a new home elsewhere. If your policy contains a cash settlement option, you are able to take the funds you would have received to rebuild your home and purchase or build a home in a new area. Without this option, you are restricted to using the funds to rebuild on your lot and would lose the funds if you decide to move away. While having appropriate limits and options on your homeowners policy are important, it should be noted that not everything is covered. There are separate insurance policies for hurricanes, floods, and earthquakes. If you live in an area prone to these natural disasters, it may be prudent to get coverage for these events.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.