INSURANCE INFORMATION INSTITUTE
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NEW YORK, September 15, 2010 — The severe wildfires west of Boulder, Colorado, this month are a vivid reminder that these events occur in numerous states other than California and that consumers need to have the right type and amount of insurance coverage, according to
the Insurance Information Institute
“Damage caused by fire and smoke is covered under homeowners, renters and business insurance policies as well as under the comprehensive portion of an auto insurance policy,” said Michael Barry, vice president, Media Relations at the I.I.I. “There is also coverage for water or other damage incurred in the course of extinguishing the fire.”
Texas was the site of the most wildfires in the U.S. in 2009, followed by California, Georgia, North Carolina and Missouri, according to the National Interagency Fire Center (NIFC). Alaska had the greatest number of acres burned by wildfires last year. Texas and New Mexico were ranked second and third in acreage burned while California and Arizona came in fourth and fifth place, respectively, the NIFC reported. ISO’s Property Claims Service estimates that since the year 2000, $484 million in insured losses in the U.S. can be attributed to wildfires, on average, each year.
The recent Colorado wildfires, now completely contained, destroyed nearly 200 structures northwest of Boulder and were not without precedent. About 600 Colorado structures were destroyed by wildfires southwest of Denver in June 2002, the NIFC stated
With the desirability of housing in scenic, wooded settings, the number of people living in wildfire-prone areas has grown considerably. About 100 million people now live in neighborhoods exposed to wildfire throughout the country, according to U.S. population statistics. Increasingly large and destructive wildfires are putting more people and properties at risk. The cost of fighting these fires continues to rise; stretched thin by large fires, firefighters are increasingly forced to choose which homes and businesses to save. Often these choices are based on which structures are most accessible and defendable, according to the Institute for Business & Home Safety.
The National Fire Protection Association's Firewise Communities
program encourages local solutions for wildfire safety by involving homeowners, community leaders, planners, developers, firefighters and others in the effort to protect people and property from the risk of wildfire. Firewise found that making entire neighborhoodsfire-resistant slowed down the spread of fire. When homes are fire-resistant, not only are they less likely to burn, but the homes themselves can also act as a fire break, reducing the ultimate size of the fire and enabling it to be brought under control more easily. When houses are not fire resistant, they add greatly to the fuel load and therefore the potential for the fire to spread because they quickly burn down to the ground.
“To protect yourself from the economic consequences of fires and other disasters, it is crucial that you purchase enough insurance to rebuild your home and replace your possessions,” Barry added. “Too many policyholders are unfamiliar with what is in their policy until they have to file a claim and by then it is too late to purchase the right amount of financial protection.”
To insure your home properly against a wildfire, the I.I.I. suggests that you ask your agent or insurance company representative two important questions:
- Do I have enough insurance to rebuild my home?
- Do I have enough insurance to replace all of my possessions?
1. Do I have enough insurance to rebuild my home?
In the event your home is completely destroyed, your homeowners policy needs to cover the cost of rebuilding at current construction costs. Unfortunately, some homeowners simply purchase enough insurance protection to satisfy their mortgage lender. Others confuse the real estate market value of their home with what it costs to rebuild it. In your discussion with your agent or company representative you should consider the following:
- Replacement Cost
Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality.
- Guaranteed or Extended Replacement Cost
An extended replacement cost policy pays a certain amount above the policy limit to replace a damaged home—generally 20 percent or more. A guaranteed replacement cost policy pays whatever it costs to rebuild your home as it was before the fire or other disaster, regardless of your policy limit. These types of coverage can be useful if there is a widespread disaster that pushes up the local costs of building materials and labor.
- Inflation Guard
This coverage automatically adjusts the policy limit when you renew your policy in order to reflect increases in construction costs. Find out whether your policy already includes this coverage or if you need to purchase it separately.
- Ordinance or Law Coverage
If your home is badly damaged, you may be required to rebuild it to meet new (and often tougher) building codes. Many insurers offer ordinance or law coverage that pays a specific amount toward these costs.
- Water Back-Up
This insures your property for damage caused by the back-up of sewers or drains. Most insurers offer this coverage as an add-on to a standard policy.
- Additional living expenses (ALE)
ALE pays for the added costs of living away from home, such as hotel bills and restaurant meals, while your house is being repaired or rebuilt. If you rent out part of your home, ALE also replaces lost income for the time you are not able to collect rent. Many policies provide coverage for 20 percent of the amount of insurance you have on your house and may specify a time limit. Additional ALE coverage is generally available for an extra premium.
2. Do I have enough insurance to replace all of my possessions?
Most homeowners insurance policies provide coverage for your personal possessions for approximately 50 percent to 70 percent of the amount of insurance you have on the structure of your home. For example, if you have $100,000 worth of coverage on the structure of your home, you would be covered for $50,000 to $70,000 worth of personal items.
To determine whether this is enough coverage, it is important to conduct a home inventory, detailing everything you own and the estimated cost to replace these items if they are stolen or destroyed by a disaster. Know Your Stuff is the Insurance Information Institute's free online home inventory software, an application that can help make creating and updating your home inventory easy and efficient. And with the I.I.I.’s free, secure online storage you will have access to your inventory anywhere, any time.
You can insure your possessions in two ways: either for their actual cash value or their replacement cost.
- Actual Cash Value Policy
Actual cash value pays the cost to replace your personal belongings minus depreciation.
- Replacement Cost Policy
Replacement cost reimburses you for the full cost of replacing the item. Suppose, for example, a fire destroys a 10 year-old TV set in your living room. If you have a replacement cost policy for the contents of your home, the insurance company will pay to replace the TV set with a new one. If you have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies also replace the item and deliver it to you. Generally, the price of replacement cost coverage is about 10 percent more than actual cash value, but can be well worth the investment in the long run.
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