Your House is on Fire!

It was still early in the morning when John woke up with a strange feeling that something was wrong. He got himself out of bed to check the house and realized the kitchen was on fire!

He was lucky, because in spite of the heavy fire, not he, his wife, nor their two children were hurt. But we will learn that he was not so lucky with the consequences from that fire.

The next day, John contacted his insurance agent, who was kind enough to give John a copy of the policy, send an expert to examine the damages, and calculate the compensation to be paid due to the fire.

The house itself was insured by the bank who had given John a mortgage. In fact, the damage to the building and the building structure was not big compared to the extensive damage caused to the contents of the house. The bank also sent an expert and the insurance company had no problem covering a few thousand dollars to fix the wall and some of the electricity and cabinets in the kitchen.

The problem was now critical. John and his family had to move out because most of their belongings were severely damaged, mostly by ash and the water used by the fire department to extinguish the fire.

John had bought an insurance policy covering fire, theft, water damages, etc. Therefore the damage caused by the fire was indeed covered by the policy, but only to a certain extent and not the entire amount, as John later found out to his despair.

When John bought the policy, the insurance agent had a surveyor come to his house, free of charge, to evaluate the value of the belongings to be insured. This was a year after John had his first child and five years before the fire.

In Israel, the insurance company will send you an appraiser who will compile a list of your belongings and estimate a price for each object. Some objects can be agreed upon, such as a certain picture, clothing, and kitchen utensils. John agreed on the price for these items. Remember that the evaluation was made when John had one child and was still in the beginning of his career. When the fire occurred John had doubled his amount of belongings but only half of that amount was insured.

The end case was decided outside the court by an arbitrator who heard both sides and gave his decision in a very clear way, leaving John with more than 65% in losses. As painful as it sounds, this decision was completely correct.

An insurance policy covers only what you actually have and no more than that. Therefore if you have a diamond ring insured by a policy and you lost it (assuming you didn`t have this type of damage covered by the policy – "all risk") and a day after, a fire broke out in your house, you will not be compensated for the ring you had already lost a day before.

John had the opposite problem. He was under insured for 50% of the real value of his belongings. His damages were around 70%. The question was: which of his belongings were damaged - the half that was insured or the other half not insured? One can understand the insurance company claiming that the entire uninsured part was damaged opposed to John`s claim – just the opposite.

This is why John`s damage was so large. He had $ 200,000 in belongings but his policy covered only $ 100,000. His total damage that day was around $ 50,000 therefore he was to be compensated for half or $ 25,000. As mentioned above, John’s losses were around 65%. WHY?

John`s "other" damages were not covered as I will explain. John proved that he had $5,000 cash in the house. That money was completely burned, but the policy only covered up to 0.5% of the total insured value, limiting the insurance for "cash" to $ 500 only (0.5% x 100,000 = $ 500).

John had to move out for an entire month and in that period, being a new immigrant with a very small family in Israel; he had nowhere to go but to a hotel that cost him another $8,000, not covered by the insurance.

John thought he would receive the check for $ 25,000 but how disappointing it was to find out he would not be able to receive all the money until he replaced the burned items! This is called "Erech Kinun" – the replacement value meaning: New under New. You are reimbursed fully for your losses only if and when you replace the lost/damaged item with a new one. If you choose to be reimbursed by "Erech Shipui" – meaning: Old under old, this means that if you do not replace the damaged item you will only be compensated for the amount of the “old” item and not the current value of a new item. In this case it would be a mere $ 15,000 out of the $ 50,000 in real damages (paid damages by the insurance company).

In the same scenario if John had the same policy but damages amounting to $ 100,000 (half the amount insured) he would receive the total insurance amount, meaning: $100.000 for "Erech Kinun".

Unfortunately, in the end, "The compensation is only a dry mathematical formula" and no more.

A word of wisdom:

An insurance policy is not a static document and your policy should be re-evaluated every year to be sure you are insured for what you have. What is the point in saving on the premium to lose ten fold that amount "saved" if damages occur? Don’t we buy insurance exactly for that reason - to be left with minimal damage?

Be wise and check your policy and the sooner the better.

Sincerely,
 

Tzvi Szajnbrum, Attorney at Law