It’s Time to Update Your Fire Insurance Policy

If you own a home with a mortgage, then your lender requires you to have fire insurance to protect your/their investment. However, many people find that they are underinsured after a fire. If you’ve had your home for more than a few years, you should call your insurance company and a few others to compare current rates at the current home value/reconstruction cost. The last thing you want to do is lose your home and then discover that your insurance won’t fully replace your home, but you’re still on the hook for the full mortgage.

What Fire Insurance Covers
I just received my first policy last month. Rather than the purchase price, which includes the cost of the land, the policy only covers the structures on the property. Specifically, my fire insurance policy covers: dwelling, additional structures, personal property, loss of use, and code enforcement. There’s also a 10% overage included in case of construction cost increases. The dwelling figure is based on the square footage multiplied by the cost to rebuild per square foot. All other figures are extrapolated as a percentage of the dwelling value. So, the shed is insured for 10% of the dwelling value. My personal property is 25% of the dwelling value. The policy is written for extended replacement cost, not current replacement cost, to ensure that I’m covered for future values and costs rather than current values and costs.

Make sure that your policy includes code enforcement. Building codes change regularly, but the updated codes typically don’t apply until the home is remodeled or rebuilt. For example, if you had a 1927 house with the original wiring, you wouldn’t have to rewire the house unless you a. did extensive remodeling that required a building inspection, or b. your house burned down and needed to be rebuilt. Depending on the age of a house, bringing it up to the new code can be very expensive.

Why You Need Fire Insurance
Not everyone needs flood insurance, or earthquake insurance, or hurricane insurance, etc. Everyone needs fire insurance. If you live in a fire zone, then it’s especially vital. One look at the fires that rage through Southern California every year should tell you that. But it’s not just a SoCal problem. It’s 100 years of bad fire policy nationwide. For a long time, firefighters stomped out every small lick of flame in a forest. They didn’t realize that a forest needs to burn periodically to spread seeds and clear out overgrown underbrush. That means, unfortunately, that today’s fires have huge amounts of fuel to burn through and sometimes firefighters can’t stop fires that threaten homes and other structures.

However, even if you don’t live in a fire zone, you’d have to live in a concrete bunker to avoid all risk of fire. A spark from a bad electrical wire, a dryer hose pulled loose by a pet, a cigarette ember hitting a dry tree in your yard, a lightning strike. Any of these things can set your house on fire. Although you can take reasonable precautions, there is still a very real danger of a fire in your home.

Even though fire insurance covers a much more expensive possession than a car, the cost is significantly lower. Our homeowner’s insurance is 1/3 the cost of our auto policy, presumably because we don’t drive our house around town where we might bash it into things. I’ve heard people argue that they don’t need fire insurance because they don’t have a mortgage, but unless they have the full replacement cost of the house saved up in cash, foregoing insurance is not a wise move. Spend the few hundred dollars a year. Even if you never need it, the peace of mind is worth something.

If you already have a fire policy, it’s time to review it. Make sure it includes today’s value, not the value eight years ago. Even your home price is the same, the rebuilding costs have most certainly gone up.

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