Burned-out homeowners pushing for fixes to insurance shortfalls - Let's talk about your HO policy - they are not all the same.
Victims of this summer’s catastrophic wildfires are struggling with insurance settlements that are too small, with burdensome requirements to itemize lost possessions and with living-expense reimbursements that run out long before they can rebuild.
That has legislators, regulators and insurers in the state working on ways to fix those concerns before the state faces another catastrophe.
“How do we incentivize best practices and create consistency so that when people get their policies, they know what they are getting,” asked State Rep. John Kefalas, D-Fort Collins, who is working on possible legislative reforms.
Discussions started more than a year ago and picked up urgency following the destruction of more than 600 homes in the Waldo Canyon and High Park fires, said Carole Walker, executive director of the Rocky Mountain Insurance Information Association.
Colorado has faced hailstorms and tornadoes but not the mass-scale devastation that struck this summer and sharply raised the volume of complaints about insurance industry practices.
“We haven’t had those kind of experiences, like hurricanes, where hundreds of homes are lost,” Walker said.
A key goal is to implement reforms that protect consumers facing big losses without driving away insurers or jacking up premiums for everyone else, the parties involved said.
One complaint wildfire victims make is that they received only a portion of their replacement payment immediately, with the remainder coming after rebuilding is complete.
It’s a standard practice in Colorado and many states, though not all. Many policy holders are surprised to discover how it works, even though it’s spelled out in policies.
“If I paid for a product, I should get what I paid for, and I’m not,” said Trish Garner, whose house was gutted by the High Park fire outside Fort Collins in June.
Garner, 48, received $181,000 from her insurance carrier, American Family Insurance, although her policy called for $231,000 in replacement coverage, she said.
The remainder is being held back until the replacement home is built, which is expected to cost about $242,000, Garner said.
“I shouldn’t have to jump through any hoops to get the extra $65,000 to build the home just because the insurance company won’t pay it,” she said.
American Family said it’s fulfilling its obligation under the policy.
“It’s normal for everyone in Colorado to take this approach, with depreciated value paid upfront,” said spokesman Steve Witmer. “If the house isn’t rebuilt, that’s their walk-away amount. If it’s rebuilt on site or elsewhere, the replacement limits come up and are paid on completion.”
Another problem is homeowners who bought lower-premium policies that reimburse based on depreciated market values only to realize later it’s not enough to pay for rebuilding their homes.
Even when homeowners took out policies covering replacement costs, many find that the models insurers use don’t reflect the reality on the ground, especially following a large-scale disaster.
“Valued policy” approachKefalas said he is studying whether Colorado should adopt a “valued policy” approach that would require an insurer to pay out a predetermined amount on a home in the event of a total loss. Those policies address another complaint by paying claims upfront.
Because insurers and policyholders agree ahead on the payout, the need for complicated calculations of depreciated market value or replacement costs are eliminated and unmet expectations reduced.
About 19 states have such policies, many implemented more than a century ago. But the local insurance industry is opposed to that option.
“Valued-policy law wouldn’t solve an underinsurance issue and wouldn’t replace contents,” Walker said.
In cases where coverage exceeded a property’s value, homeowners would have less incentive to protect it, and some might even be motivated to pocket the difference by triggering a claim.
Kefalas said he wants to make sure implementing a valued-policy approach won’t push up premiums in the market.
One compromise might be to require insurers to add valued policies to existing options, said Colorado Insurance Commissioner Jim Riesberg. Consumers willing to pay the higher premium can do so, without passing the costs throughout the whole system.
Many consumers don’t appreciate the large gap that can exist between a home’s depreciated market value and its replacement costs.
A plain-vanilla suburban home reflects discounts that a production builder obtained from building in scale, Walker said. Replacing that home after a fire is a custom job and will cost more.
Insurers urge consumers to go with replacement and replacement-plus policies rather than cash-value policies, Walker said.
But even when homeowners go with more expensive replacement coverage, that product doesn’t always live up to its name, argues state Rep. Claire Levy, D-Boulder.
“The policies aren’t upfront about what they mean,” she said. “They are too much of a moving target.”
Stricter building codes, construction price hikes following big losses in an area, and homeowner improvements often don’t get put into the replacement-cost models that insurers use.
Among the most irksome issues that victims of wildfires and other catastrophes complain about is the need to itemize lost contents and then haggle over their value with insurance companies.
“I know there’s nothing illegal about that, but it’s just immoral,” said Dale Snyder, a retired homebuilder whose house in Rist Canyon burned in the High Park fire. “It seems they’re trained to frustrate you as much as possible.”
Shelter Insurance spokesman Joe Moseley acknowledged the frustration but said the alternative would cost more.
“Yes it’s a pain and it’s particularly traumatic in this situation to have to provide the inventories, but the way of a valued policy means higher premiums on the outset,” he said.
Sticklers on itemizingMost Colorado homeowner’s policies cover possessions up to 75 percent of the home’s value, said Riesberg, the state insurance commissioner.
Often, the coverage a homeowner needs is much less, one reason insurers are sticklers on itemizing.
“If they weren’t on the hook for 75 percent, they might be more willing to make a different payment,” he said.
A potential solution would be to give homeowners who want to skip itemization a lower payout, say 40 percent of the policy value of a home, or some amount based on a typical home’s contents.
Those wanting coverage for more valuable items such as antiques, electronics or jewelry would be required to establish value in advance, a much better time to do it than after the fact.
Martha Lemert, who lost her home in the High Park fire, hasn’t had any issues, mostly because she had taken photos of all her belongings and stored them on a website.
“Our company (Liberty Mutual Insurance) paid us the limits without problems,” she said, noting she simply handed over a CD with photos.
“We documented pretty much everything of the house,” she said.
Insurers limit the amount of time they will cover living expenses, most often to a year, although a few carriers offer two years. The limits reflect a desire to push along the rebuilding process.
When it comes to construction in the mountains, even two years often isn’t enough, said Levy, who represents Boulder.
Riesberg said one resolution might be to create a special fund in the state to cover living costs when rebuilding stretches beyond the standard coverage periods.
Some changes that might be considered:
• Create a reduced reimbursement option for those who don’t want to itemize lost contents.
• Establish a fund to pay for those who run out of living-expense reimbursements.
• Introduce a “valued policy” option that establishes a fixed and upfront payout.
• Improve consumer understanding of insurance policies, including plain language rules.
Copyright 2012 The Denver Post. All rights reserved.
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