Thoughts on the LA Fires and Home Insurance
Thoughts on the LA Fires: A Reminder About Homeowners Insurance
The recent fires in Los Angeles have been a sobering reminder of just how quickly things can change. We were hoping all our clients would come through unscathed, but unfortunately, one did lose their home in the Eaton Fire. It’s heartbreaking to see anyone go through that kind of loss, and it got me thinking about something most of us rarely pay attention to until we absolutely have to: homeowners insurance.
Insurance is one of those things that sits in the background of our lives. We pay for it, hope we never need it, and if we do, we expect it to work exactly as we imagined. But reality has a way of shaking those assumptions. If you haven’t taken a good look at your policy in a while, now might be a good time to do so.
The “Cheapest” Policy Dilemma
I can’t imagine anyone who lost their home in these fires is thinking, "Wow, I’m so glad I went with the cheapest policy!" And yet, many of us—myself included—tend to shop based on price. I get it. I’m as frugal as they come. But when it comes to something as significant as rebuilding your home, insurance is one of those areas where cutting corners can have serious consequences.
The goal, of course, is to strike a balance between affordability and adequate coverage. But what does "adequate" actually mean? Many homeowners assume that if they have insurance, they’re fully covered. Unfortunately, that’s not always the case.
Understanding Your Coverage: Guaranteed vs. Replacement Cost
Depending on your loan amount and how much you put down when you purchased your home, your lender may not have required you to carry “Guaranteed” Replacement Cost Coverage. Instead, you may have a policy that assigns a replacement cost value based on an estimate made when you first took out the policy.
Here’s the key difference:
• Guaranteed Replacement Cost Coverage: This means your insurance will cover the full cost to rebuild your home, regardless of how much construction prices have increased. This is particularly important in places like Southern California, where costs can rise dramatically in the aftermath of a major disaster.
• Replacement Cost Value Coverage: This type of policy only reimburses up to a set dollar amount. That amount is typically determined when the policy is issued and may not be enough if rebuilding costs have gone up—which they almost certainly will after a widespread fire that destroys thousands of homes. In such a scenario, homeowners with this kind of policy could find themselves having to cover the difference out of pocket.
The Real-World Impact of Underinsurance
Imagine losing your home in a fire, only to find out that your policy won’t cover the full cost of rebuilding. Suddenly, you’re not just dealing with the emotional and logistical nightmare of losing everything—you’re also facing an unexpected financial burden. With over 16,000 homes needing to be rebuilt after the recent fires, labor and material costs are almost guaranteed to spike. If your policy only covers a set amount that was calculated years ago, you could find yourself in a difficult position.
We’ve seen this happen before. After devastating wildfires in Paradise, California, many homeowners discovered they were significantly underinsured. Some had policies that only covered 60-70% of their actual rebuilding costs. Others thought they had “full coverage,” only to find out that their definition of “full” and their insurance company’s definition weren’t quite the same.
A Quick Insurance Check-Up
So, what can you do? For starters, take a few minutes to review your current policy. Look for key terms like "Guaranteed Replacement Cost" and make sure you understand what your coverage actually includes. If you're not sure, a quick call to your insurance agent can clarify things.
And if you don’t have your policy handy—no problem. If you’ve worked with us on a mortgage, we likely have a copy from your last loan closing. Just let me know, and I can help you track it down.
Why This Matters Now More Than Ever
Wildfires aren’t going away, and neither are other natural disasters. While we can’t predict exactly when or where the next major event will happen, we can take steps to be prepared. Having the right insurance coverage won’t prevent a fire, but it can make a world of difference in helping you recover if the worst happens.
This isn’t a sales pitch for any insurance company—just something to think about before a disaster forces you to. A little proactive effort now could save you a lot of heartache later.
If you have any questions or need help figuring out where to start, don’t hesitate to reach out. We’re always here to help.
Stay safe, Eric
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.