The Bucket Brigade

Prior to the epic Wine Country fires in Northern California this past October, very few people, and I mean very few, even knew of anyone who lost their home to a fire, let alone lost a home themselves. Now with over 5,000 homes destroyed, just about everyone in the North Bay either lost a home or knows someone who did.

As the fires began to come under control, those of us who lost our homes turned our attention to the fine print of our homeowner’s insurance policies. Unfortunately, we were in for a shock: most of us were underinsured.

For those of you who did not lose a home, now is the time to scrutinize your homeowner coverage to see what types of coverage (or as I call them, “Buckets of Money”) you have. Odds are very high that you are underinsured unless you have been proactive with your insurance agent. Here is a quick rundown on the various “Buckets of Money” that can exist in your homeowner’s policy:

The Buckets

The Dwelling A Building Coverage Bucket

The Dwelling A Building Coverage Bucket is the maximum amount you will be paid on a total loss of the structure. Divide the coverage by your total square footage to get a coverage per square foot. For example, if you have a 2000 square foot (SF) home, and your Dwelling A coverage is $400,000, you have $200/SF of coverage.  Then contact a builder to see if you can actually rebuild for that amount of coverage.

For those who had lived in their homes for a few decades but had not been in contact with their insurance agent about keeping the coverages current, we generally found ourselves woefully underinsured, often to the tune of hundreds of thousands of dollars.

The Replacement Coverage Bucket

The Replacement Coverage Bucket provides additional coverage over and above your Dwelling A coverage for either rebuilding your existing home or purchasing another home. Replacement coverage is generally based as a percentage of Dwelling A coverage. I have seen these figures range from 10% up to 100%, or higher.  For example, if you have 50% replacement coverage, you would have another $200,000 of coverage to spend on rebuilding or replacing your home. This would bring you up to a total of $600,000 of coverage ($400,000 plus the extra $200,000) or $300/SF for a 2000 SF home.

Debris Removal Bucket

Someone needs to clean up your lot after your home has burnt down. This bucket of money will usually be a percentage of your Dwelling A coverage, like 5% to 10%.

The Building Code Upgrades Bucket

The Building Code Upgrades Bucket covers the cost of bringing the replacement home up to current building codes. In Sonoma County, our building code now requires sprinklers in new home construction. The cost of installing those sprinklers will be a building code upgrade.

The Personal Property (PP) Bucket

The Personal Property (PP) Bucket covers the replacement of your home contents. Imagine you were to pick up the home, turn it upside down and shake it. Everything that fell out would be considered PP. This is generally a percentage of your Dwelling A coverage.

There are two components to the PP coverage: Actual cash value (ACV) and replacement cost value (RCV). ACV is the RCV less depreciation based on age and condition. RCV is the value the carrier will pay you once you finally buy the replacement item at the store.  For example, assume you own a shirt you bought eight years ago. It or something comparable currently retails at $100. Further, assume the shirt depreciates or loses 5% value every year. After eight years, a total of 40% (5% x eight years) or $40 ($100 x 40%) has been lost to depreciation. The ACV would be $60 and the RCV would be $100.

The insurance carrier would pay you $60 now for the ACV, and then pay you the remaining $40 once you have bought a replacement shirt.

The Additional Living Expenses (ALEs) Bucket

The Additional Living Expenses (ALEs) Bucket pays temporary living expenses, such as rent, while you are displaced, waiting to either rebuild your home or buy a replacement home. Some policies have a term of how long ALEs will be paid out, such as 24 months.

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There can be some unique coverages in one’s policy not discussed in this article. Insurance policies are not created equally. Every insurance carrier has different contractual terms, so it is important to read through the policy to understand what you are paying for.

The Bottom Line

The bottom line is this: To completely lose your home while underinsured can be a major game changer, and it can happen to anyone. Contact your insurance agent immediately to review your coverages, and use this article as a guide.