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Thursday, November 4, 1993
Orange County Edition
Section: PART A
Page: A-30

Many Fire Victims' Insurance Falls Short;
O.C. recovery: Unless homeowners have special coverage, firms won't
pay for upgrades to meet stiffer building codes.


Reeling from the loss of their homes in last week's inferno, many
Laguna Beach property owners have now learned that their homeowners
insurance doesn't completely cover the cost of rebuilding.

Laguna Beach is filled with hundreds of older homes built on steep
hillsides long before building codes required extensive geological
surveys, bedrock-secure foundations and other expensive measures designed
to protect them from earthquakes and mudslides.

Many were built before building codes mandated double-pane windows,
insulation, special electrical wiring, fire-retardant roofing and other

Without the proper insurance to cover the cost of building to today's
standards, some homeowners could be forced to pay tens of thousands of
dollars to upgrade their homes.
"The position of the insurance industry is that they don't build up to
current codes," said City Manager Kenneth C. Frank, whose insurance will
not completely cover what it will cost to rebuild his 25-year-old home,
which burned in the fire.
"They will only replace exactly what was there," Frank said. "As a
homeowner, that was a surprise to me."
Dozens of property owners have been meeting with their insurance
agents over the last few days to find out how much money is available for
temporary living quarters, how long it will take to get their homes
rebuilt and whether they have enough insurance to get a new home back in
On Wednesday night, about 80 people jammed a meeting of Farmers
Insurance policyholders in Laguna Beach. Some, like Cort Kloke,
questioned the basics of their policies.
Kloke, a mortgage broker who lost his home in Mystic Hills, said he
guessed that rebuilding his home up to new standards would cost 30% above
his home's value and that his insurance won't cover the extra expense.
After the fire in Oakland two years ago prompted questions about
inadequate insurance policies, Kloke said he called Farmers and was told
the extra coverage wasn't available. Now he's stuck.
"I think the people who make the biggest fuss may come out OK, but
they will exploit the uninformed, the naive and the unprepared," Kloke
said. "I think this is simple misrepresentation in what is supposed to be
a consumer protection era."
Even those who purchased top-of-the-line insurance that guarantees
replacement of a fire-devastated home--no matter the cost--are learning
that what it takes to pay for extras is usually excluded.
Typically, homeowner insurance policies don't cover the costs of
rebuilding to current codes, insurance industry officials say, unless the
homeowner buys an extra "endorsement."
"It is not routinely written on homeowners' policies," said Richard
Clemson, a senior insurance claims officer with the California Department
of Insurance. "I don't know why not."
Since July, however, insurance agents in California have been required
to disclose to new homeowners and to those renewing insurance the
availability of insurance that includes coverage of upgrades mandated in
new building codes.
Legislation making the disclosure mandatory was approved in the wake
of the Oakland hills fire of October, 1991, when many burned-out
homeowners complained that they never knew code upgrade coverage was
available, Clemson said. Now, he said, "if you are dealing with a company
that offers it, they have to tell you."
In the Oakland hills fire, he said, most insurance companies at the
urging of the state ultimately agreed to pay for code upgrades. He said
the Department of Insurance similarly may intervene to help the people of
Laguna Beach.
But state Insurance Department spokesman Bill Schultz said the
department would be careful not to place an inordinate financial burden
on the insurers. "Equally important to protecting the interests of the
consumers," he said, "is to safeguard the financial solvency of the
Laguna Beach Mayor Lida Lenny said she is prepared to hold the
insurance companies' "feet to the fire" on the code issue by having the
city play a strong advocate role for residents seeking to rebuild.
State Sen. Art Torres (D-Los Angeles), chairman of the state Senate
Insurance Committee, said he is in the process of making code upgrades a
required component of all homeowner insurance policies in California.
Policies that now guarantee home replacement in a fire are "misleading
to the public," he said. "These policies should be written in plain,
understandable English and they are not."
Laguna Beach Councilman Robert F. Gentry, who lost two houses in the
fire, said: "I think it's going to affect almost every property owner who
has had a total loss. It could change our community. If people cannot
replace their homes, they will have to go elsewhere."
The lack of code upgrade insurance will be "devastating" for him
personally, Gentry said.
Until the fire, he said, he never knew that kind of coverage existed.
"I thought I bought replacement insurance. It didn't say
replacement--except for the foundation."
Ina De Long, president of United Policyholders Inc., a consumer
advocacy group based in Oakland, said the Laguna beach fire victims "need
to organize and fight back.
"A homeowner policy is (designed) to put you back to where you were in
the event of a loss," she said. "But when a carrier sells you a policy
without code upgrade coverage, they know you can't go back to where you
were. It's impossible and they know it."
De Long said insurance companies "aren't anxious" to sell insurance
covering upgrades to building codes because they "can't control what city
and county building departments will require and so they have difficulty
rating it."
State Farm officials said a homeowner can buy extra coverage for new
building codes if they pay about 10% over the policy premium. The extra
money buys an extra 50% of coverage.
"So if you had a $100,000 policy, it would give you an extra $50,000
for code compliance," a State Farm claims officer explained.
While State Farm said this additional coverage is considered
relatively pricey, De Long said, "if you really need it and have an older
home, it is very inexpensive, especially in California, which is
earthquake country, and meeting newer codes for foundations can cost
$80,000 to $100,000 on a hillside."
If the Oakland experience is any indication, De Long said, the extent
to which insurance companies will bend to help fire victims without the
extra insurance will vary and depend on what political pressures are
brought to bear.
Rock Jenkins, spokesman for State Farm, said his company may pay for
code changes that are relatively inexpensive such as changes in
electrical wiring, plumbing and roofs. But he said it would draw the line
at expensive foundation work.
Farmers Insurance, which insures owners of 92 homes destroyed in
Laguna Beach, is standing pat.
"At this point we are not planning on paying for code upgrades" unless
the policyholder has purchased extra coverage, said Jeff Beyer, vice
president of public relations for Farmers Insurance Group.
Beyer added, however, that Farmers plans to amend its basic homeowners
policy to include code upgrades.
Upgrading to code could have a major impact on the rebuilding in
Laguna Beach, said City Manager Frank and local real estate officials.
They noted the age of the homes in Mystic Hills and in Laguna Canyon,
where some houses were built as beach cottages with single-wall
"I would say any but the most recent houses are going to be subject to
newer codes in some manner," said Mark Singer, a prominent Laguna Beach
Exactly how much money underinsured fire victims may be forced to pay
out of pocket has yet to be determined. Federal Emergency Management
Administration officials said they will offer low-interest loans of up to
$120,000 to help homeowners rebuild.
But Barton Long, 60, a systems engineering consultant who lost his
home of 20 years on Skyline Drive, said: "Many people in the neighborhood
are in retirement or getting toward retirement and their major investment
is their home. If they had to go into major debt, it would create a
substantial hardship."


Copyright (c) 1993 Times Mirror Company


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