Fire! How to Keep a Bad Situation From Getting Worse
By: RICHARD D. SNYDER
November 2003
For most of us, reviewing the adequacy of insurance coverage for fire or other disasters ranks on our “to-do” lists somewhere below reorganizing the garage. However, for both individuals and businesses, overcoming the urge to procrastinate will help to keep a bad situation from becoming even worse following a fire.
Avoidable surprises that people may experience after a fire include the following:
Underinsurance/Co-Insurance Penalties
When you bought your home, the lender was mainly interested in seeing that there was enough coverage to protect its own interests. As a result, your equity interest in your home may not be fully insured. As residential real estate values have spiked upwards, many homeowners are now underinsured – following a fire, they have found their insurance coverage to be insufficient, and have lost their accumulated equity. To make matters worse, many policies contain “co-insurance” penalties if the amount of coverage falls too far below the property’s actual value – such as below 90% of its value. For example, if a building is covered for only 80% of its true value, the insurer might apply a 20% reduction to any claim that is made, even if that claim is within available policy limits. Thus, the insurer might only pay $32,000 of a $40,000 claim, despite the fact that coverage limits on the property are much higher than that amount. Policyholders need to make sure that they are covered for the full value of the property.
Lack of Replacement Cost Coverage
Under the typical “actual cash value” coverage available in insurance policies, the insured may receive only a fraction of the amount of money needed to replace the damaged property. Under this type of coverage, the insurer pays the cost of replacing the property, but reduces that amount to account for the depreciated or “used” condition of the property immediately before the fire. This will not be enough to rebuild or replace the damage. This problem can be alleviated by purchasing a “repair and replacement” endorsement, which will pay replacement costs.
Lack of Building Ordinance Coverage
If fire destroys half of your building, city officials may refuse to permit the remaining portion of the building to be used, and instead may enforce ordinances requiring you to build over from scratch. Also, a raft of new building codes, ranging from upgraded electrical and plumbing specifications to more expensive building materials and sprinkler systems, likely will make rebuilding much more expensive. Owners may be surprised to learn that many policies do not cover rebuilding costs that are increased by ordinances. The insurer may claim that it is only obligated for the cost of giving you the building you used to have – despite the fact that such a building is now obsolete and cannot legally be built.
The solution is to purchase an endorsement covering increased costs.
Inadequate Business Interruption Coverage
This type of insurance is intended to maintain the business’s stream of income until repair or replacement of the damaged property is completed. Extended coverage is also available to cover lost income and continuing expenses from the point when repairs are completed until the insured is able to restore its prior level of business. Both are important. Businesses without this type of coverage may never recover from a fire. Contingent business interruption coverage also is available to reimburse losses that occur as a result of damage to someone else’s property – such as your biggest supplier or biggest customer.
What to Do After a Fire
You can also avoid making the situation worse by doing the following in the event of a fire:
- Immediately notify police and fire departments.
- Immediately notify the insurer. Call your agent and also follow up with the insurer directly. All insurers have toll-free numbers for reporting losses.
- Secure the property and protect it from further damage, including vandalism, exposure to the elements, etc. The cost of doing so usually is covered, and the insurer may actually reduce your ultimate recovery to the extent that you failed to protect against further damage.
- Preserve all evidence. The insurer can deny coverage if evidence needed for its investigation is destroyed or discarded. Also, it can say that its rights to pursue the entity that actually caused the fire – such as the manufacturer of a defective water heater or appliance – was compromised, therefore forfeiting coverage.
- Photograph the damage. Start with the view approaching the building, which will put the scope of the loss in context. Detailed photos of the interior will help show what existed before the fire and may spur memories of exactly what was in the building before the fire.
- Keep a careful record of expenses incurred, both to secure and preserve the property and to determine the amount of the loss. These may be reimbursable by insurance.
Determining structural damage is a job for engineers. Some insureds hire public adjustors if disputes occur with the insurer about the extent of damage to personal property or its value. Public adjustors usually take a percentage of the ultimate recovery.
Should you hire a lawyer? Maybe. Many loss adjustments with the insurer are non-controversial. However, consider hiring a lawyer if the insurer has hired its own lawyer to direct the adjustment, or if the insurer wants to take your examination under oath, has asked you to sign a non-waiver agreement, or has sent you a reservation of rights letter. Other signals that a dispute with the insurer may be on the horizon include: the insurer has changed adjusters or the adjuster won’t provide answers to direct questions, withholds investigation reports, and/or removes evidence from the scene without explanation.