Common Insurance Issues after Disasters
By Ted Ricasa
You've been making your payments to the insurance company for years. You have never filed a claim. Then you have a fire. The act of putting out the fire created water damage. While you were trying to figure out how to deal with this, mold began to grow. No worries - your insurance will cover it, right?
Then you find out about exclusions, exceptions, and other limitations that are buried in clauses throughout your policy. You purchased insurance so that you could be made whole again in the event of a disaster, but you realize now that the insurance company's definition of "whole" is quite different from yours.
This is the sort of stuff you wish they had taught you back in school, but they simply didn't. Of course, when you step back and examine the situation from the perspective of the insurance company, the clauses in your policy make perfect business sense. But where does that leave you?
What does "make me whole" really mean?
When you purchase insurance, you have several options for coverage to consider. In general, there are two basic types of coverage: replacement cost and actual cash value. A replacement cost policy will cover the full cost of returning your home to the standard and state it was in prior to the destructive incident, minus your deductible. Conversely, an actual cash value policy will provide coverage up to the depreciated value of the damaged property, minus your deductible.
For example, let's say that half of your kitchen cabinets are destroyed. They were originally worth $5,000 and are now worth about $2,000, factoring in depreciation. At today’s prices, it will cost $8,000 to replace them, and your deductible is $500:
- If you have replacement cost coverage, your insurance will cover $7,500 of the cost of repairs. You will be responsible for only the deductible of $500.
- If you have actual cash value coverage, your insurance will cover $1,500, the estimated current worth of the cabinets. You will be responsible for the deductible of $500, and if you want to restore your cabinets to the previous standard, you will be responsible for the additional $6,500 in repair costs.
In either case, the insurance company will consider its obligation to make the homeowner whole again fulfilled, per the conditions of the contract.
If you had a mortgage on your home, then your lender almost certainly required that you carry insurance coverage worth at least 80 percent of the value of your home. However, even those homeowners who have replacement cost coverage for their homes often have only actual cash value coverage for the possessions within their homes. As a result, truly restoring their standard of living after a disaster remains difficult, if not impossible, at least in the short term.
Can I level the playing field?
If you are dissatisfied with the settlement offer made by your insurer, you can always fight the insurance company. Keep in mind, however, that the insurance adjuster has likely entered into this same fight hundreds of times, and you are a novice. It's not a fair fight, to say the least.
A good option is to hire a public adjuster. This will help to level the playing field. An experienced adjuster will represent you and your interests. They know precisely how to deal with large insurance companies and maximize your settlement. By hiring a public adjuster at the outset, you will put yourself in the strongest possible position. On the other hand, if you choose to represent yourself against the insurance company, you are essentially giving them the upper hand and putting yourself in a position of vulnerability.
Can I keep my insurance check and not make the repairs?
Homeowners often wonder if it is legal and ethical to keep the insurance money without making the repairs for which the money was intended. The answer is yes. Many homeowners have spent years paying their insurance bills only to find that, when disaster strikes, the amount of money the insurance company is obliged to pay is not enough to cover their losses in full.
Ultimately, the insurance company is obligated to "make you whole" in the event of a covered incident. However, the definition of "whole" depends entirely on the kind of coverage that you have and the terms of your policy.
How will the insurance company react to my not using the money for repairs?
In general, once the insurance company has made you whole, they don't care what you do as long as you are not leaving a dangerous situation that might cause a future claim.
Using the previous example, you can decide not to replace your cabinets at all. You can paint the wall yourself and bank the money. The insurance company will have no problem with your doing that. At least in this case you cannot find additional damage and file a follow-up claim.
Can I walk away?
Some homeowners don't want to invest in bring their homes back up to their previous standards. Perhaps they do not like the idea of working with contractors. Or maybe they are not willing to augment their insurance settlement with their retirement funds to restore a property that they were considering selling anyway.
In the end, homeowners who choose to walk away from their damaged properties can do the necessary repairs and try to optimize their returns. This is a timely and expensive process in the interim, but it could ultimately pay off. For those homeowners who wish to avoid the costs and headaches of taking that route, however, it is also possible to sell their homes immediately for cash and walk away with an entirely clean slate.
For further information on your options and rights as a homeowner, feel free to consult with the experts of Fast Home Help.