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SHAKEN, NOT STIRRED

When Mother Nature decides that it is time for a little rouse, it happens the way 007 likes his martinis – “shaken, not stirred.”  After all, we live on an ever-evolving ball of violent, volcanic eruptions and continuously mashing and grinding tectonic plates.  But, for some reason, we decide to densely populate exactly where the potential for impending devastation to our lives is the greatest.  Take, for example, California, where we have built some of our largest cities right up as close as we can possibly get to the San Andreas Fault, arguably one of the most dangerous faults in the world.  Why?  I suppose, for some reason, we are compelled to live on the edge; it stimulates our senses and keeps us sharp, just like…you guessed it…007.  No, really, what are we thinking?  The explanation is actually very simple – we just cannot get our brains wrapped around the potential danger.  Here is what our hardwired brains say, “disasters don’t happen, and if they do, they will never happen to me.”

This is exactly why most of us do not purchase earthquake insurance.  Granted, earthquake insurance can be expensive, which can be an economic deterrent, but that is really not what prevents us from buying it – our brains are just not wired to comprehend the objective risk.  In other words, unless we have actually experienced a catastrophic disaster ourselves, we are not likely to fully prepare for one.

Remember the episode near Mineral, Virginia, just a few weeks ago, where the magnitude of the earthquake was reportedly 5.9 on the Richter scale?  Despite the fact that it’s been over 100 years since the last earthquake of that magnitude in that general area, the risk is higher there than other areas along the Eastern Seaboard, because it is sitting right on top of a tectonic plate.  As a result, the resulting damage costs have been estimated at somewhere between $200 million and $300 million, with less than half of that insured.

Earthquake insurance can be expensive, potentially adding between 10% and 100% to the current policy premium, and it carries a high deductible, somewhere between 2% and 20% of the Coverage A.  But, it is catastrophic insurance and is not intended to provide protection against minor incidents of damage.  In other words, it is designed to protect against major or total devastation and the loss of most, if not all, personal contents.

Simple Example:

Current Coverage A = $400,000.00 (Dwelling)

Annual Premium      = $900.00

Deductible                = $1,000.00

With Earthquake Endorsement

Annual Premium      = $990.00 – $1,800.00

Deductible                = $8,000.00 – $80,000.00 (For Loss Resulting From Earthquake)

The cost of earthquake insurance is dependant upon a number of variables, such as the age of the building, the location (proximity to a fault and the stability of the soil) of the property and the type of construction (frame or brick).  In other words, the cost of EQ insurance for an older, brick home in Hayward, CA, would be a heck of a lot more expensive than a newer, stick-built home in St. Paul, Minnesota.  Did you know that only 12% of those who carry fire insurance in California also buy earthquake insurance?  If you live in California, or own property there, earthquake insurance is available, check out the California Earthquake Authority (CEA).

To experience an earthquake, at least one of any sizeable magnitude, is unsettling to say the least, but if you feel you might be a little over exposed and a little underinsured, contact your insurance agent to discuss your options.

None of us live in an air tight, bomb-proof bunker, and risk will always be a part of our daily lives, so try not to stress about it – sit back, try to relax and if you are still a little uneasy about it (and if you’re so inclined) have a tall, chilled martini – shaken or stirred (usually the bartender’s choice anyway).

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I Don’t Feel So Good

When we think of mold, it conjures up bad connotations – scary images of neglect, expensive remediation and possible litigation, and with good reason as we will discuss.  However, mold (fungi) is not always so chilling; there is also its beneficial, useful side.  For example, you probably already knew that mold (Penicillium-a genus of ascomycetous fungi) is instrumental in the development of antibiotics, but did you know that Penicillium is also used to treat (that white powdery stuff) the casings of salami to prevent spoilage during the curing process?  Neither did I before viewing an article on the Discovery Channel.  Mold is also instrumental in the formation of different types of cheese such as Gorgonzola and Roquefort “m-m-m-m,” AND it is an integral part of the fermentation of beer.  So you see, now, mold isn’t so bad, is it?

YES IT IS!  Enough of the warm and fuzzy (pardon the pun), let us get to the forbidding, cursed “Black Mold (Stachybotrys chart arum shown above).”  There is no beneficial or useful side to this toxic menace.  On the contrary, it has been the subject of numerous, controversial lawsuits and blamed for endless maladies to human health, to include the determination made by the Centers for Disease Control (CDC) of the cluster of 27 child-deaths in Cleveland, Ohio in the early 1990’s.  This is bad stuff, which is why real estate professionals, owners, developers, lenders and borrowers need to pay attention to the huge part toxic mold can potentially play on their liability exposures (property damage and/or personal injury).

There are four critical requirements for mold growth – available mold spores, available mold food, proper temperatures and significant moisture – all of which are ever-present, especially indoors with an unattended leak and contact with material of high cellulose and low nitrogen content (fiberboard, gypsum board [drywall], paper, dust and lint).  Once inside, and given the proper conditions, black mold can get a foothold in a structure in as little as 24 hours.

Since the situation in Ohio, there has been a drive pushing mold issues to the forefront and court decisions have placed the burden squarely on not only property owners, but also on insurance companies to shoulder the cost of multi-million dollar settlements.  Here are just a few examples:

  • Television celebrity (and Budweiser spokesman – ironic, huh?) Ed McMahon agreed to a settlement of$7.2 million after suing his insurance carrier.
  • Twelve immigrant families in Alameda County, CA were awarded $1.3 million after suing their landlord.
  • A Texas couple received $4 million against their insurance carrier.  This is the infamous case from Dripping Springs (appropriate location), Texas, where the homeowners filed a “breach of good faith” claim against their insurer, Farmers Insurance Group, and were initially awarded $32 million! An appellate court later reduced the award to $4 million and the homeowners settled out of court for an undisclosed amount.  After receiving their settlement, the homeowners eventually bulldozed the contaminated home.  This is an interesting case, and it certainly sent a shock-wave across the insurance industry and ultimately contributed to insurers either drastically limiting or explicitly excluding mold-related claims from their policy forms.

Although most lawsuits spotlight either the building contractor for not allowing enough time for the interior woodwork or cellulose material to dry before sealing, or the architect for negligent structural or mechanical designs, it is not uncommon to have up to 100 individuals or entities drawn in as defendants in a mold-related claim, TO INCLUDE real estate professionals.  Rather than risk involvement in an expensive lawsuit, pay a little extra attention to its prevention (“an ounce of it is worth a pound of cure”) and here some steps to follow:

  • Have any and all leaks repaired immediately!
  • A damp, musty smell means a potential problem – look for evidence!
  • Keep humidity below 60%!
  • Open exhaust vents or windows in the moist rooms (bathrooms and kitchens)!
  • Drain landscaping AWAY from foundations!
  • If you detect mold, CLEAN IT UP!  IMMEDIATELY!

Mold has been around as a troublemaker for a long, long time.  If you doubt it, check out Leviticus Chapter 14, Verses 33-57 in the Old Testament.  And, it just could be the source of King Tut’s Curse.

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Your Reno Vacant home, is it insured?

When insurance is purchased for the purpose of protecting the home and its contents, and it is intended to be lived in (occupied), insurance companies are generally able to determine the rate to charge for a homeowner’s policy with a high degree of certainty that they will not get stung.  Consequently, because the expected variables, or perils, remain relatively constant, they really don’t lend themselves to any surprises when accepting the risk.  After all, they have decades of experience accurately assessing the risk of insuring occupied properties.  Therefore, insurance companies are able to determine, within a reasonable level of expectation, that they will make a profit.  Let’s face it, insurance companies, as with any business in our great free market, strive for a large, positive, bottom line.

However, when the property is vacant (no contents) or unoccupied(contents, but nobody home) for an extended period of time (usually 60-90 days), the game changes and “all bets are off.”  When word gets around that a property is in abandonment or disuse, thieves and vandals show up out of nowhere.  Glass is broken, walls are smashed, and those with no place else to go (squatters) take up illegal residency, building fires on frigid nights in the middle of what was once a formal dining room.  One might assume that if the personal belongings and the furnishings and appliances are all gone there would be nothing left to steal, but it’s amazing how industrious thieves really are; they will take anything of value –  building materials, carpets, countertops, bathroom fixtures, and best of all; copper pipes and wiring to be either sold or used somewhere else.  Another example is what if a minor leak breaks out – a very common problem that is usually fixed in a very short period of time by the occupier to prevent further damage.  But, if there is nobody there, the problem can exist for weeks or even months, with disastrous results to ceilings, carpeting, or worse – the dreaded “M” word that results from mixing a little moisture to a little organic material (wood) and with the proper temperatures – Voila!.

There are many reasons properties become vacant, but some of the most common are:  the previous owner has died and the property has gone to estate; it was a rental that has lost its useful value and the owner is waiting to sell it; it just is not going to be used for an extended period of time; or (most commonly now), the lender has foreclosed on it.  In any case, the insurer will either cancel the policy outright, or they will offer an alternative – a vacant dwelling policy, which is a watered-down version, or short list of the coverage that was in place when the property was occupied.  Over 90% of homeowners are unaware of this and are in danger of risking everything as it concerns the property because they have simply never read the provisions in there insurance policy.  In fact, right now, there are thousands of homes out there sitting uninsured without the owners’ knowledge.

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My Home is Worth What?

I’ve been asked numerous times, “If my home’s current market value is $300,000.00, why then am I having to insure it for $400,000.00?”  Consequently, I’ve created my first blog with an explanation that just might help understand what seems to be an inflated home value, simply for the purpose of inflating the cost of a homeowners insurance policy.

First of all, determining the price of a policy involves a few more criteria than just the perceived value of the home.   In general, what concerns the insurance company are things like:

  • Residence Type (Primary, Secondary, Rental)
  • Protection Class (Exposure to fire and fire suppression method)
  • Year Built
  • Construction Type
  • Age of the Main Systems (heating, plumbing, electrical), and when were they last upgraded, if at all
  • Type of Roof
  • Number of Fireplaces and Type
  • Square Feet
  • Number of Stories
  • Type of Garage
  • Alarm System
  • Interior Sprinkler System
  • Trampoline
  • Dogs (breed)
  • Loss History

As you can see, insurance companies are not too concerned about market value, because if a catastrophe happens and the home is totally destroyed (by a covered peril; e.g., fire), it will be their responsibility to pay to rebuild it, and do so at the current construction costs.  Simply put, let’s say the size of the home is 2,000 square feet, and, taking into consideration all of the above, the cost to rebuild it is roughly $200.00 per square foot (per the insurance company’s cost calculator), then the appropriate replacement cost value, or Coverage “A” on a homeowners insurance policy, will be approximately $400,000.00, and the policy will be priced accordingly.  Coverage on the policy for Other Structures, or Coverage “B,” and Personal Property, or Coverage “C” will then follow per a default percentage of Coverage “A.”

Some tips for lowering your homeowners insurance costs can be found at 12 Ways to lower your home owners insurance cost  published by the Federal Citizen Information Center.