Coverage Corner

DEBRIS REMOVAL AND UNDERINSURANCE

By Bill Wilson

In the 1970s, I recall reading a National Fire Protection Association article that cited research indicating less than 3% of reported fire losses to buildings were total losses. My guess is that today this figure likely approaches 1% or less.

But not in Pacific Palisades, California.

In this wildfire-devastated Los Angeles neighborhood, one estimate suggests that almost 88% of buildings damaged by fire were destroyed. And we know from past experience that most homes are underinsured across the country. In California, we also know that insurance markets are scarce and that many homeowners without mortgages own uninsured homes.

But even if a home is adequately insured on a repair or replacement cost basis, often the amount of coverage available for debris removal in the case of total losses is grossly inadequate. And, given that reconstruction following a conflagration of this magnitude can take years, Additional Living Expense coverage may soon run out. In addition, reconstruction may need to meet more stringent building codes, resulting in a need for additional amounts of Ordinance Or Law coverage. So, it’s quite possible that many or most of the victims of this wildfire will be significantly underinsured.

But for the purpose of this article, let’s focus primarily on debris removal. Jim Mahurin, CPCU, ARM is a risk management consultant with over a half century of experience in evaluating insurance programs, mainly for businesses and governmental entities. He has found that, all too often, debris removal coverage was not even considered when coverage was placed and, as a result, was significantly inadequate, especially in the case of major losses. He has seen demolition and debris removal costs totaling 40% or more of the property damage.

The same is true for residential properties. John Putnam, CPCU, ARM has done extensive consulting work in multiple Colorado wildfire conflagrations. He writes specifically about the critical role of debris removal coverage in wildfire recovery in an article at IRMI.com.

In the case of total or large losses that exhaust primary policy limits, most homeowners’ policies provide an additional amount of 5% of the limit of liability for the damaged property to pay for debris removal. In the case of high value home policies, this figure may approach 30%.

Los Angeles county has a two-phase approach to reconstruction. Phase 1 involves the removal and disposal of visible household hazardous waste, a potentially costly process that may trigger pollution-related policy exclusions or limits.

Phase 2 involves site assessment and documentation, asbestos assessment and removal, other debris removal, soil testing and contaminated soil removal and disposal, hazard tree removal, erosion control, and at some point in the future, a final inspection. THEN rebuilding might begin AFTER the permitting process begins and contractors and materials become available.

In other words, rebuilding wildfire-devastated areas are likely to take years and could involve substantial amounts of money that may not be available from insurance proceeds.

Are your customers’ homes adequately insured for replacement cost onsite or rebuilding elsewhere? Are their debris removal limits adequate? How about Additional Living Expense, Ordinance Or Law, and other coverages?

German philosopher Hegel opined that, “What experience and history teach is that nations and governments have never learned anything from history and have never acted in accordance with the lessons that could have been drawn from it.”

There will be many lessons to be learned from the Pacific Palisades and other wildfires. The question is, are we willing to learn and invest in what it takes to prevent or limit the adverse effects of such conflagrations?

Bill Wilson, CPCU, ARM, AIM, AAM is the founder and CEO of InsuranceCommentary.com and the author of six books, including the Amazon 4.8 star “When Words Collide…Resolving Insurance Coverage and Claims Disputes” which BookAuthority ranks as the #1 insurance book of all time. He can be reached at Bill@InsuranceCommentary.com.