How to Add to Your Meal.
In a previous Chapter, we introduced the concept of underinsurance. That article explained that while claim handling lawsuits focus on activity that occurs after the date of the loss and are based on breaches of the insurance contract, potential underinsurance claims focus on activity that occurred before the loss, including during insurance policy renewals, and often when the original policy was purchased.
Most homeowners’ insurance policies contain three basic types of coverage: coverage on the dwelling that covers damage or destruction to the house itself (sometimes call “Coverage A”), damage or destruction to personal items within the house (sometimes called “Coverage B”), and coverage for additional living expenses incurred while the home is uninhabitable (commonly known as “ALE Coverage”).
For most homeowners’ policies, including policies issued by the company that wants you to believe they are a “good neighbor”, unless otherwise requested by the policyholder, that coverage limits for Coverage B and Coverage C are formulaic, and based upon a percentage of the Coverage A limit. For example, it is not unusual for Coverage B to be set at 70% of Coverage A, and for Coverage C to be set at 30% of Coverage A.
The genesis of an underinsurance claim is generally when the actual cost to repair or rebuild your home significantly exceeds the Coverage A limit. However, because Coverages B and C are routinely set as percentages of Coverage A, an artificially low Coverage A limit can have a cascading effect, and also impact the Coverages B and Coverage C policy limits. As a result, a strong argument can be made that if your Coverage A limit was improperly set too low, the Coverage B and C limits are also too low.
To walk though an example, let’s assume that your Coverage A limit was $2,000,000. Chances are that your Coverage B limit would be $1,400,000 (70% of Coverage A), and your Coverage C would be $60,000 (30% of Coverage A). Let’s say that you purchased a policy with extended replacement cost coverage, and the estimate to rebuild your home from a qualified and respected builder is $4,000,000.
An extended replacement cost policy is supposed to cover the cost to repair or rebuild your home, plus a cushion for demand surge pricing that may take effect (the increase in materials and labor prices that frequently occur after a widespread disaster). Unless you purposely asked to lower your Coverage A limit, you should not be $2,000,000 underinsured (the difference between the actual cost to rebuild your home and your Coverage A policy limit). If those are the facts, your extended replacement cost policy did not fulfill its primary purpose. Either the policy was fundamentally flawed, or the Coverage A limit was improperly selected, usually because the replacement cost estimate used to set the Coverage A limit was flawed. In lawsuits seeking claims for underinsurance, you would allege that those flaws are the responsibility of the insurance company, the agent, and the software used to create the replacement cost estimate. The insurance company will argue that the flaws were caused by the policyholder.
To follow-through with the example above, if the Coverage A limit was $2,000,000 less than it should have been, the Coverage B (personal items) and Coverage C (ALE) policy limits were $1,400,000 (70% x $2,000,000) and $60,000 (30% x $2,000,000), lower than they should have been. That is an example of the cascading effects of underinsurance that we described earlier.
Assuming that the value of your personal items (Coverage B) destroyed in the fire was equal to or excess of $2,800,000 (what your Coverage B policy would have been if the Coverage A limit was correctly selected), and your ALE expenses (Coverage C) was equal to or exceeded $120,000 (what your Coverage C policy would have been if the Coverage A limit was correctly selected), those are additional amounts that you should be entitled to seek to collect in the lawsuit.
Speaking of Coverage B personal items, most homeowners’ policies cover “accidental direct physical loss to personal property caused certain specific perils. Fire is one of those perils (as is smoke). It is always interesting to see which perils are included and which perils are excluded. For example, windstorms and hail are a covered peril. Rainstorms and floods are not (however, you can purchase separate flood insurance). That is why when a hurricane or tornado destroys a home, there is always debate whether wind caused the damage to personal property (e.g. by first blowing off the roof), or whether the personal was already damaged by flood, before the roof blew off. Personal property destroyed in the “wind-first” scenario may be covered by the homeowners’ policy, however personal property destroyed by the “flood-first” scenario would likely not be covered. As wildfire victims, we are “lucky” to not have the “which peril came first” fight with our insurance companies. Damage from both fire and smoke are usually covered.
For personal items damaged, just about every homeowners’ policy requires the insured to “prepare an inventory of damaged property”. That inventory is to include “in detail” the quantity, description, age, replacement cost, and amount of loss for each personal item. While this list is usually referred to as a “personal property Inventory” or some similar name, in our family and for good measure, it became known as “The F’ing List”. Interestingly, our insurance contract allowed the insurance company to require the insured to, “while not in the presence of any other insured”, give statements, and “submit to examinations under oath”. I find it a little strange that, before a lawsuit is even filed, a private insurance company can require its policyholder to swear an oath. Unless, of course, the oath is sworn to that "Jake" guy, or perhaps the little gecko.
It is bad enough that, as wildfire victims, we lose our homes, everything we own, our schools, and our communities. Then comes the requirement to list every spoon, sock, and screwdriver lost in the fire. If Congress ever decides to amend the Constitution again, they should seriously consider adding The F'ing List as an example of cruel and unusual punishment.
Then comes the requirement to list every spoon, sock, and screwdriver lost in the fire.
After the Palisades and Eaton fires, the California Insurance Commissioner “recommended” that insurers waive the personal inventory list requirement and simply pay full Coverage B benefits. While some insurance companies heeded the recommendation, others did not. I am making an understatement when I tell you that the “F’ing List” became a major point of contention in our family, and for thousands of other families as well.
If filing a lawsuit against your insurer accomplished nothing else but eliminating the need to compile the F’ing List, that alone would make the lawsuit worthwhile.
Unfortunately, the F’ing List can be important evidence to support your case if you decide to pursue a lawsuit, so if Coverage B personal property is one of the coverages you intend to pursue in the lawsuit, you may want to start working on the personal property inventory list, if you haven’t already.
The list will be invaluable in proving your personal property losses, especially if you are pursuing a claim for underinsurance.
The manner is which insurance companies typically reimburse personal property losses, at least for insureds with replacement cost coverages, is also worthy of discussion. One misnomer about the claims process for personal property is that the price that you paid when you purchased the item is relevant to the reimbursement amount. It is not. What the insurance company wants to know is the age of the item that was lost in the fire, its condition, and the current cost to replace the item (not the price you paid for it).
That information is used as part of a two-step process that insurance companies use to cover the cost of replacing the item if you have replacement cost coverage. In step one, the insurance company pays you the cash value of the item at the time of the loss. Cash value (or depreciated valve), is calculated by taking the current cost to replace the item, reduced by the age of the item at the time of the loss. For each year of age, the current replacement cost is reduced by 10%.
For example, let’s say you purchased a couch 5 years ago, and the current cost to replace the couch is $20,000. During the first step of the reimbursement process, the insurance company will pay you the cash value of the couch at the time of the loss, which is calculated by reducing the current cost to replace the couch ($20,000), by 10% for each year since you purchased the couch (5 yrs x 10% = 50%). The cash value of the couch at the time of the loss is therefore $10,000 (50% x $20,000) and that is the amount that you will receive from the insurance company as Step 1 of the reimbursement process.
Step 2 of the process occurs when you actually go out and buy the replacement couch. At that point (assuming the new couch costs $20,000), the insurance company will pay you an additional $10,000, which equals the dollar amount it cost you to purchase the replacement couch ($20,000) less what the insurance company already paid you during Step 1 of the reimbursement process ($10,000). As you can see from the example above, you are not paid the full amount of the cost to replace the item until you actually purchase the replacement item.
One question the frequently comes up is: do I have to purchase the exact same item that w as destroyed in the fire? The answer to that question is usually “no”, but it needs to be comparable. For example, if the item lost was a high-end LG television from 2021, you are not expected to find a 2021 model to purchase. So
How Personal Item Reimbursement Works
you are entitled to purchase the current (2026) equivalent model. And if you decide that you want a Sanyo television instead of an LG television, assuming the prices are similar, that will likely be fine with the insurance company as well.
Why the Two-Step Process?
Although nobody from the insurance company ever explained to us the reasoning behind the two-step reimbursement process, my sense is that it serves 2 functions: 1. It confirms that you actually replace the item that was destroyed; and 2. It guards against fraud. The purpose of Step 1 is to put you in an equivalent financial position that you were in when you incurred the loss. Because you owned a used couch that was worth approximately $10,000 at the time of the loss, you initially receive $10,000. However, keep in mind that you have replacement cost coverage, which is supposed to cover the cost when you re-purchase the item. That is the reason for Step 2 of the reimbursement process. If you never re-purchase the item, you are stuck with the value of the couch at the time of the loss, and never get the second payment.
As for preventing fraud, the two-step process dissuades the homeowner from “exaggerating” the quantity of the items lost. For example, the two-step process serves as a deterrent for the homeowner claiming they lost 20 televisions in the fire, as opposed to two. Because Step 1 only pays the homeowner the cash value of the items lost, and the Step 2 payment does not occur until you actually replace the items, the only way for the homeowner to experience a financial windfall from fraudulently claiming 20 televisions as opposed to 2, is for the homeowner to actually purchase 20 new replacement televisions. And who needs 20 televisions? The same process works for every item lost. For example, it dissuades the homeowner from claiming they lost 100 expensive handbags as opposed to 10. To perpetuate the fraud and receive the financial windfall, the homeowner would have to purchase 100 new expensive handbags.
Insurance Fraud is a Serious Offense
Since we raised the topic of fraud above, insurance fraud generally means committing an act of deception against an insurance company for financial gain. Ramifications can include misdemeanor or felony conviction (jail time), fines, a permanent criminal record, denial of your claim, policy cancellation, restitution (paying the money back), your name appearing on national databases like the Comprehensive Loss Underwriting Exchange (CLUE) and the National Insurance Crime Bureau (NICB), denial of future insurance, loss of financing (mortgage lenders require homeowners’ insurance), potential loss of professional license after a felony conviction (e.g. medical license, legal license), potential loss of employment, and great personal embarrassment.
Homeowners’ coverage for personal items has so may exceptions and loss limitations (e.g. total jewelry, $2,500) it would be difficult to list them all here. However, it is worth mentioning that although the two-step reimbursement process explained above applies to most personal items, there are exceptions. For example, certain classes of goods do not lose their value over time (and may actually increase in value). For things like artwork, fine-china, and crystal, for example, there is usually not a requirement to initially pay you only the cash value. Think about it this way: what items did you lose in the fire that do not dimmish in value over time and are not usually subject to “wear and tear”? Those items may be subject to a different reimbursement process.
Finally, one more point about the F’ing List and the two-step reimbursement process. Let’s assume that you have $750,000 of personal items coverage. Let’s also assume that the current replacement cost of the personal items lost is $1,600,000, and the cash value of the personal items lost at the time of the fire is $800,000. Based upon our underinsurance Chapter, the first thing that you should recognize is that your personal items were likely underinsured by $850,000. And that can turn the two-step reimbursement process into a one-step process. Because the amount of the cash value of your items lost ($800,000) exceeds your personal items coverage limit ($750,000), once you receive payment of the personal items cash value as part of Step 1, you have been paid everything you are entitled to receive based upon the personal coverage limit of the policy.
Therefore, you are not required to repurchase the items, because there is no Step 2. In this instance, the good news is that you should not have to repurchase each item lost in order receive the maximum personal items coverage limit under the policy. The bad news is that you have incurred a financial loss on your personal items lost in the fire of $850,000.
The personal property inventory may be one of the most important pieces of evidence in your insurance claim.
An understated Coverage A limit can also reduce your Coverage B personal property limits and your Coverage C ALE limit because those limits are often calculated as percentages of Coverage A.
For replacement-cost coverage, insurers usually pay personal property claims in two steps: actual cash value first, then the balance after replacement.
If your personal property losses exceed your Coverage B limit, the second payment may never occur because the policy limit has already been exhausted.
Build your personal property inventory carefully. It may become important evidence in both your insurance claim and any later underinsurance lawsuit.
In the next Chapter, we’ll discuss Alternative Living Expense (ALE or Coverage C) policy provisions and why they may be “out of this world”.
