Money

Do You Need Fire Insurance? Here's A Stark Reminder To Check.

Most home insurance policies cover fire, but it's not always enough.
11/13/2018 08:18am ET

Massive California wildfires this month that have claimed thousands of structures and at least 42 lives may have you wondering if you have adequate insurance protection.

“As we saw with last year’s fires, homeowners couldn’t fully repair their damaged homes with insurance proceeds because they didn’t understand until too late what their policies did and didn’t cover,” said Chris Jackson, CEO and founder of financial planning firm Lionshare Partners in Los Angeles.

Over the past couple of decades, insurers have generally made it tougher for consumers to adequately insure their property, Jackson said. Home insurance policies increasingly are becoming less generous and more complicated, he said, shifting the risks and costs from insurers to policyholders.

So, if you’re concerned that your home and belongings may not be covered in case of a fire, here’s what you need to know.

Is Fire Coverage Included In Homeowners Insurance?

Thanks to growing awareness of fire safety practices, fires are on the decline overall. Unfortunately, that doesn’t include wildfires, which are more destructive than ever. In fact, more than 80 million acres of the U.S. have been burned by wildfires in the last 11 years. And wildfires happen in every single state.

But even if you don’t live in an area particularly prone to wildfires, losing your home or belongings to fire is a still a risk you should protect against. From faulty wiring to an abandoned stove burner, accidents happen. There were an average of 358,500 home structure fires each year from 2011 to 2015, accounting for three-quarters of all structure fires, according to the National Fire Protection Association. Cooking equipment was the leading cause.

Typical homeowners insurance policies do cover your home if it’s damaged by a fire. The three main areas that are covered by insurance include:

  • Main dwelling: If the structure of your home is damaged or destroyed by a fire, you are covered by your homeowners insurance policy. This includes your actual home and any attached structures, such as a garage or deck.
  • Detached structures: Homeowners insurance will generally cover structures located on your property that aren’t attached to your home, such as sheds and detached garages. Many policies will cover landscaping, too.
  • Personal property: Belongings inside your home such as furniture, appliances, clothing and valuables such as jewelry and art are also protected by most homeowners insurance policies. If they are destroyed by a fire, your policy will reimburse you for the value. However, most policies will limit reimbursement to a percentage of the policy, usually 40 percent to 75 percent.

In addition to reimbursing you for physical property, home insurance policies often cover expenses related to hotels, meals and other costs incurred because your home was uninhabitable due to the damage.

However, it’s important to understand that home insurance coverage maxes out at a certain dollar amount. This can be a problem if the market value of your home has risen above the replacement cost, or if you own many valuables, in which case the reimbursement amount might not be adequate.

Another potential pitfall is that insurers sometimes provide actual cash-value coverage. Unlike replacement coverage, this takes depreciation into account when determining how much you’re reimbursed, Jackson explained. “Actual cash value could fall short of covering replacement, leaving the policyholder to foot more of the bill,” he said.

What To Do If You’re Underinsured

“For many people, their home is their greatest asset, so it is crucial to avoid being underinsured,” Jackson said. In order to find out if your home is properly insured, Jackson recommended asking your insurance company three key questions:

  1. Do I have enough insurance to rebuild my home and replace all my possessions?
  2. Do I have enough coverage for additional living expenses?
  3. Do I have enough insurance to protect my assets?

“The key here is to make sure that your particular policy provides you with enough coverage,” said Jackson. If the answer to any of these questions is no, you’ll need to increase your coverage, if possible, or purchase a separate fire insurance policy. When it comes to your belongings, you might want to purchase a rider to protect valuable items.

You should also be aware that insurance companies sometimes change coverage when policies renew. So, just because you had adequate fire coverage when you purchased your policy doesn’t mean you still do. It’s important to review the fine print of your home insurance each year to make sure you’re still protected.

What If You Live In A High-Risk Area?

Though most homeowners are adequately protected by their home insurance policies in the case of fire, that’s not necessarily true for those who live in areas with a high risk of wildfires.

Premiums are on the rise for homeowners in areas at risk of wildfires, and some insurers are refusing to renew policies for people in danger areas, Jackson explained. “Your insurance company might also require you to make a few changes to the exterior of your house and the property that surrounds it if it’s located in an area that’s especially vulnerable to wildfire,” he said.

However, some insurance companies offer discounts if you take certain steps to prevent damage to your home, such as installing fire-resistant roofing or participating in a Firewise community education program.

Homeowners who live in high-risk areas and aren’t able to find additional fire insurance coverage must turn to state-sponsored programs. For instance, California residents can buy coverage through the California FAIR plan, which is meant as a last-resort option and covers up to $1.5 million for a structure and its contents.

Unfortunately, for some residents of affluent areas such as Topanga and Malibu, which are being ravaged by fires right now, that may not be enough.