Five Tips in Dealing with Wildfire Losses

Here we go again: another disaster, another insurance test. Will Southern Californians whose homes and businesses were destroyed or damaged by wildfires fare better with their insurance providers than Katrina’s victims? Will businesses fare any better than those affected by Sept. 11?

This time, one might think, the applicability of insurance coverage to the loss is at least unambiguous. Unlike Katrina claims, for instance, there will be no wind versus water battles — coverage for fire is the bedrock first-party insurance coverage. Coverage should be undisputed. The checks should be forthcoming.

Not quite. Insurance policies are never unambiguous. While the fact that some coverage exists might be undisputed for most who suffered losses in the fires, first-party insurance disputes typically are not about whether coverage exists but rather how much coverage exists. How much was a house worth and how much will it cost to rebuild? How much income was a company knocked out of business by the fire going to earn over the next few months?

Policyholders and insurance companies always come to different conclusions on those issues, and the magnitude of the differences becomes much greater when insurance companies face many similar claims. Policyholders — individuals and businesses alike — must be prepared to fully document all losses and seek the coverage for which they have paid.

Following are five things for policyholders, and their agents and brokers, to consider in pressing claims.

1. Get a copy of the policy, read it and give notice. First, a policyholder should get a copy of the policy from the insurance company. Agents and brokers can help, and policyholders are recommended to go through them. With or without the policy, give notice as soon as possible; there is no harm in doing so and the failure to do so can be disastrous.

Include all known losses and a catchall to cover losses that may be discovered after the fact. Do not wait for complete information. If necessary, the policyholder can provide updates later. If the client cannot determine which insurance policy provides coverage, provide notice under all conceivably applicable policies.

Once notice is given, read the policy. Property policies typically are bulky, and their wordings and coverages are complex. Yet property insurance is not high-energy physics. A close reading of the policy with the help of the agent or broker will probably reveal most of the provisions under which coverage may exist, and form a basis for intelligent discussion with the insurance company.

2. Quantify the claim. If the claim is big enough, policyholders should consider hiring an accounting firm that specializes in property insurance coverage accounting, or hiring a loss adjuster who specializes in preparing property claims for policyholders. The agent or broker can make recommendations.

3. Be wary of the “independent adjuster.” Some “independent adjusters” may represent themselves to be “the policyholder’s” adjusters. The adjuster does not work for the policyholder. As an insurance industry representative, the adjuster may not be as vigilant as the policyholder in assessing the cost of reconstruction and repair. One source of consistent shortfall is insurers’ use of data to estimate construction costs. Policyholders should ask adjusters whether they accounted for the spike in construction costs that typically follows a disaster.

Second, the California Department of Insurance has authorized insurance companies to use out-of-state adjusters (as insurers generally do after major disasters). These imported “storm troopers” generally lack knowledge of local conditions and local costs. It behooves home and business owners to inquire about their adjuster’s credentials.

4. Be a squeaky wheel. It is commonly believed that insurance companies resort to the tactic of rationing by hassle, denying claims and doing all they can to discourage policyholders, finally paying only the persistent policyholders who do not take “no” for an answer. Regardless of whether this is true or not, agents should advise policyholders to demonstrate to the insurance company that they have a claim that will not go away. For instance, the policyholder can write letters and ask for information and written explanations of coverage. If unanswered, the policyholder should write further letters incorporating all previous requests for information and requesting immediate responses. Conversations should be confirmed in writing.

Written, contemporaneous correspondence is a must if the claim goes to litigation. If a claim goes sour, written requests for information can later combat any claim that the policyholder’s lack of alacrity was the cause of losses.

5. Explore all avenues of coverage. While all property insurance policies cover fire, some exclude damage from mudslides, which often follow wildfires in Southern California. On some policies, mudslide coverage is available as an endorsement. Policyholders should check to see if they have mudslide coverage.

Further, while homeowners and commercial property policies universally cover fire damage, most policies exclude mold damage. Mold frequently occurs in fire-damaged buildings that were soaked during firefighting or that remain partly exposed to the elements when the fire subsides. Policyholders whose property suffers damage from multiple causes must be prepared to make a case that damage stems from covered causes — for example, that walls infested with mold were first destroyed irreparably by fire.

Individuals or businesses with substantial claims must be prepared to engage actively with their insurers or to hire their own adjusters, who can represent their interests. Agents and brokers should advise their clients to be proactive and assertive; be prepared to document their losses; and persist in getting their losses covered.