Good Information Regarding Insured Losses

Many have lost residences, vehicles or other belongings in the fires which are still smoldering all over the Tri-County area of Sonoma, Napa and Mendocino.  We have personally experienced these losses within our firm family as well.  Our hearts go out to all those who have been affected by the fires.  As we begin to regroup and assess what has happened, many of you are going to be in a position to either file claims with your insurance company or help someone else with their insurance claim.

First, understand that while your insurance company may have people who are caring and concerned for you in this horrible time, the reality is that the insurance business is a business.  They have a responsibility to live up to the promises made in their contract with you evidenced by your insurance policy, but, if you have ever sat down and tried to read your actual insurance policy, it may be clear to you that the wording is not entirely clear, and that can lead to differences in opinion regarding covered losses and non covered losses.  If you have trouble with determining what your insurance policy actually covers, it may be worthwhile to work with your family attorney or certified public accountant that have experience in reviewing the coverages and can help decipher your particular coverages to help you with your claim.  Your CPA can also be a very valuable resource in helping to pull together documents you may need to provide to your insurance company to properly support your claim.

There have been many types of losses.  The largest of these will typically be the loss of your home and its contents.  Your homeowners’ policy will typically cover this combination of losses PLUS temporary living expenses while you either replace or rebuild your home.  Other losses people experienced are vehicle losses, and specific property losses which may have been covered by separate policies or policy riders on your homeowners’ policy.

Very quickly, in general, the loss of a vehicle will be covered by the comprehensive coverage under your vehicle’s insurance policy.  Comprehensive insurance is meant to replace your vehicle in the event the car is damaged or destroyed in an event which is not covered by another specific coverage like collision or uninsured motorist.  If you lost a vehicle in the fire (and there were very clearly many vehicles destroyed in the fire) you should reach out to your car insurance company’s claims department to determine if your vehicle was covered with comprehensive insurance.  If not, your vehicle MAY be a covered loss under your personal property coverage of your homeowner’s insurance if the vehicle was inside the garage when the home burned.  Your insurance policy may have a specific exclusion in the personal property coverage for vehicles.  You should explore this with your insurance agent if you determine you are not covered under your auto insurance policy for this loss.

With regard to your home itself, there are many types of coverage which may be present in your homeowners’ policy.  Usually, there is actual damage coverage, intended to repair or rebuild the structure, specifically the structure as it was built.  This coverage will have a maximum dollar amount associated with this coverage.  However, many of the structures lost in the fire were built many years ago.  The building codes have likely changed since then.  It is also likely that the building department may adjust the building code going forward in part as a result of things which are being learned in reviewing what happened on the morning of October 9, and in the next several days.

There is a special rider that insurance companies sell to give protection to homeowners having to rebuild, subject to stricter and more expensive, building codes which came into being after the home was originally built.  These riders also in most cases have limits which need to be paid attention to.  In many cases the building code rider is based on a percentage of the base coverage, say 10% of the structure replacement policy limit.  On top of this, you may have guaranteed replacement coverage, which is intended to cover you for unanticipated cost increases.  The combination of the guaranteed replacement coverage and the code enhancement rider should provide assurance that in the event of a total loss, which is the case for many of the thousands of homes destroyed in this firestorm, your home, upgraded to current building codes, can be rebuilt.

EVENTUALLY, there will be rebuilding of the homes and complete neighborhoods and businesses which were consumed by the fire on October 9.  It is our understanding that there will be a concerted effort made to cut the red tape generally associated with getting a building permit.  However, there are certain facts that need to be kept in mind.  Over 5000 homes were lost in this fire.  It will be impossible to reconstruct these homes in any short amount of time.  5000 homes is roughly the amount of homes in a town of 20000 people or more.  A good example would be to imagine rebuilding the whole town of Windsor.  This is a massive undertaking.  In addition, there was already a shortage of housing in our area, and some building expansion was already underway to satisfy the growing demand.  This will undoubtedly cause issues.

Generally, insurance covered replacement of property is covered as a nontaxable “exchange” under Internal Revenue Code Section 1033.  The requirements are that any money provided by the insurance company for an insured loss be used to replace the lost property with “like property” within 2 years after the end of the first tax year when any part of a reimbursement resulting in a gain is received by the victim of the loss.  Since our “loss date” is generally October 9, 2017, the general rule would be that if the insurance pays some or the entire claim before the end of 2017, the code would allow you to use the money to purchase like kind replacements before the end of 2019.  This information will be most useful to you for personal property replacement.  If the property lost was used in a trade or business (or rental) activity, the replacement period is three years, and FOR PERSONAL RESIDENCES THE REPLACEMENT PERIOD IS FOUR YEARS since the loss was in a federally declared disaster area.  This is very important in this case, since it is easy to imagine that people will be struggling to replace the lost homes even into the fourth and fifth years, and even longer.

Insurance recoveries which are not used to acquire replacement property within the allowed replacement period need to be reported as if the property that was destroyed was sold for the insurance recovery amount.  In the case of non-business personal property, the evaluation is treated as a whole.  For business personal property, each item must be evaluated separately as to whether the recovery amount results in a gain or loss.  These amounts would be reported in the same manner as assets sold and would appear on a form 4797.

An important note is that there is also a provision under Section 1033 which provides that the IRS may consider requests to extend the period for acquiring/replacing property lost in the fire.  Due to the likelihood that it will be difficult to complete a rebuild of all of the lost properties within the four year time frame, it is good to know that the IRS will consider allowing more time to complete a qualified replacement acquisition and avoid having to potentially report a taxable gain.

For purposes of claiming your loss, more evidence is better.  If you have pictures of the items lost, or video of items, along with a list or lists of items which were in the home before it was destroyed, that is a good start.  If you are going through the location of your residence looking for items of interest or value which may have survived enough to be saved, it would be wise to video your findings.  Not that you need to video what you actually save, but there will be evidence of what was lost.  Chair frames, bed frames, metal table frames, kitchen appliances dinnerware, utensils, glassware, crystal remnants lamps, pottery, tools, knick knacks and many other destroyed items will leave behind skeletal remains which prove they were there.  That, along with your lists, photos taken in the space and videos taken in the space will provide significant evidence you can use to impress your insurance claim adjuster that you need to be taken seriously.

Many insurance policies will pay for replacement cost of the items you can prove were lost, if they are indeed replaced.  In the instance where you prove an item you had was destroyed, but you choose not to replace it, in general, the insurance will reimburse you for a “depreciated value”.  For example, if you bought a brass and glass table 15 years ago for $500, which was destroyed in the fire, that now would cost $1000 to replace, and if the insurance company assigns a “useful life” of 20 years, the reimbursement amount will be $1,000 (the replacement value) X 25% (5/20 of the total value) or $250 if you decide not to replace it.  If you choose to replace it, you would be allowed $1000.  Chances are you will not want to replace it with the exact same thing (brass and glass).  You may be able to replace it with a similar table of different materials but the same value.  That is something to discuss with the claims adjuster.

Remember that the claims adjuster is not on your side.  He or she works for and is paid by the insurance company.  His or her job is to make sure that they honor their contract with you for as little money as they can possibly get away with.  That is how insurance companies make their money.  Trust me, they make a lot of money because they are good at this part of the business, and most people making claims aren’t.  Usually, the person experiencing the loss is not well equipped to effectively press their claim and prove their losses.  Your best weapon is evidence you can pull together to support what you are claiming.  Don’t worry that you can’t put a picture of everything in front of the adjuster.  You can provide other forms of evidence.  Let’s say that a week before the fire, you bought a leather couch and recliner from Costco for $2,400.  Since there had not been any parties or other reasons to pull out the camera or take videos, you don’t have a picture of the new furniture in your house.  No worries.  You can ask Costco to print out a list of what you purchased from Costco (at any Costco Warehouse – it is tracked to your membership number) and your new couch and recliner will be listed there, along with what you paid for them.  Credit card companies can print out years of your credit card history to provide you with indications of major purchases.  You can then use that to request reprints of the invoices stored in the store computer to indicate your ownership.  There are many other ways to reconstruct documentary evidence to support your list. Be creative.  Give us a call for ideas if you get stuck.

Your policy may also have coverage for temporary living expenses.  This will be important, because costs for accommodations in our area have been skyrocketing over the past few years and are likely to only get worse.  The temporary living expenses coverage is on top of your coverage for the property and its contents.  Use of the temporary living expense coverage does not affect the coverage for other items.  To the extent you are entitled to coverage and you choose not to use it, the only entity you are helping is the insurance company.  You owe it to yourself to try to get back to as normal a living experience as possible as quickly as possible so that you can get on with your life.  You have paid for this coverage for many years in a lot of cases, and now is the time to use it.  Be aggressive in what you ask for.  Don’t immediately take no for an answer.  If the insurance company says no, ask them to show you where in your policy they are relying to deny you coverage you believe you are entitled to.  If there is a difference between what you believe the insurance covers, and you think the policy language backs you up, but the insurance company asserts that there is exclusion, it may be worthwhile to consult with an attorney who specializes in insurance cases.  The language used in the policies is, in some cases, purposefully unclear, and the language used can be difficult to reach clear answers.  I have personally seen lawyers argue about the meaning of a sentence in an insurance policy which depended on the placement of a comma in the sentence.  If you need to consult with an attorney for these matters, we recommend that you do so.  However, use this resource sparingly.  Your legal fees could accumulate quickly and your policy is unlikely to provide you reimbursement for your fees, even if you prevail.

If you have been directly impacted by the fire, you are likely still in disbelief over what happened.  It is important to not make hasty decisions regarding the future.  Rebuilding will be neither easy nor quick.  Even if you rebuild, things will not be the same when you are done.  In the meantime, your focus should be on making well-reasoned, sound decisions which facilitate your ability to get back to some semblance of what you want your life to be going forward, and to protect your assets as best possible.  There are people who have experience with this who can help you.  Call us if you would like help in sorting through the difficult decisions which lie ahead.