Lessons learned from the Oakland Hills Fire Storm
Changes in Guaranteed Replacement Cost Policies
Things Policy Holders need to Consider
by Michael Papuc
Attorney at Law
44 Montgomery Street
Suite 2405
San Francisco, CA 94104
In October, 1990, the Oakland Hills fire storm destroyed over 2000 homes. Most insurers provided guaranteed replacement cost policies to the homeowners, with replacement cost coverage for personal property based on a percentage of the homeowners limits. Insurance Commissioner John Garamendi pressured insurers to re-write policies in place at the time of the fire-storm to provide guaranteed replacement cost coverage.
The guaranteed replacement cost policies guaranteed enough insurance to replace the home, regardless of the property damage limits in the policy. The limits were for the most part set by the insurer, after an inspection of the home, to make certain enough premiums were generated to cover the losses.
This practice was based on the assumption that only one or a few homes would be destroyed at a time. The cost to replace would be based on available market data for material and labor at the time of issuance of the policy. Many policies would have inflation guard, which would increase policy limits based on rate of inflation each year..
What the insurance carriers and homeowners did not anticipate was that in a firestorm destroying 2000 + homes, the demand for materials and labor will by far out-strip supply, and the cost to rebuild will be delayed, and increase substantially, often more than 100% of what the carrier anticipated to be the cost of the loss. There are only so many contractors, lumber yards, tool rental establishments, and hardware stores in a given area.
After the Oakland Hills fire, carriers began issuing new policies providing limits on coverage, and sometimes increasing the limits by as much as 50%.
Often, the insurance agents, who were looking at the potential loss of business, would represent to the policyholder to not worry about the change, because the insurer inspects the home and determines the amount it will cost to rebuild. This gives the insured the false impression that no matter what happens, there is enough policy limits to replace the home.
Another issue to be of concern is that the Additional Living Expense coverage is limited to one year, meaning that the house must be rebuilt within one year, or the insured is on the hook for additional costs of substitute housing beyond that time, while at the same time paying a mortgage on their home. When there is a shortage of labor and materials as a result of a fire-storm, there is a likelihood of exceeding the one year period for Additional Living Expense Coverage.
