The dollar cost of recent disasters, each widely reported in the media, are extraordinary, with losses in the billions.
Each new report seems to set unprecedented levels. However, data reported are limited to “direct costs” for these kinds of losses for individuals and families:
• repair and replacement of cars and trucks;
• debris removal;
• reconstruction costs for homes; and
• repair or replacement of household contents.
These direct costs are only the tip of the iceberg because indirect costs are not calculable at this point and therefore cannot be reported in the media — yet each is very real.
The scenario for individuals or families includes these indirect costs:
• without a place to call “home” and no relatives (or good friends) with whom to stay, a hotel room must be accessed — at high aggregate cost over the months that follow;
• without food on hand and no kitchen for food preparation, meals must be in restaurants — also at high cumulative cost;
• older homes will be required to be brought up to code to comply with more recent Building Code requirements; and
• many jurisdictions enforce a local building code requirement that when damaged beyond 50 percent of its value, the home’s undamaged portion must be demolished.
You must be asking: how long will it take to rebuild our home or to find a new apartment?
Debris removal may take a month or longer – depending on supply and demand of contractors. For apartments, availability may be limited if, as in Napa-Sonoma, demand greatly outstrips supply.
To estimate your need for cash flow to pay hotels and restaurants, some assumptions are needed. For example, assume a hotel room costs $100 per day and restaurant meals another $100 per day (for easy calculation). So, $200 per day for 180 days equals $36,000.
Drafting plans for your new home may take months to be completed to your satisfaction. Then the plan approval process begins with the City or County. If their departments are already behind in processing, how long will it take in the wake of a conflagration?
In a major loss, you may want to plan on a full year to get back to some semblance of normalcy.
What’s the solution?
A homeowners (or renters) insurance policy is an outstanding solution. Each includes “additional living expense” coverage. It’s usually in the amount of 20 percent of the insurance amount on the structure (or on contents in a renters policy).
If a home is insured for $300,000, the "additional" limit will be $60,000. This should be adequate in most cases. (Don’t forget to request advance payments from your insurer’s claim adjuster, if it’s not otherwise offered.)
If your home is older, many building code upgrades can be imposed by the city or county — not covered by basic homeowners policies. Be sure your policy is endorsed to cover “building ordinance and law” risks.
These scenarios are in the context of recent wildfires and hurricanes. But they apply equally to the catastrophic risk confronting each of us in Kern County — that of the overdue major earthquake. By “major” we mean an intensity of 8.0 or higher and shaking of 120 seconds or longer. (This compares with an intensity of 7.3 and only 20 seconds of shaking here in 1952.)
Although most of us have insurance for fire, windstorm and other risks, only about 20 percent have earthquake insurance. Request proposals from your agent or broker — both as an extension of your current policy and as a separate earthquake policy (a “DIC” – difference in conditions) policy where premiums and deductibles typically are lower.
Once you’ve taken these important steps, you’ll enjoy the key benefit of risk management, viz., a quiet night’s sleep.
John Pryor of Bakersfield is a risk management consultant and author of “Quality Risk Management Fieldbook” published by the International Risk Management Institute in Dallas.