Mortgage Lenders require borrowers to carry fire insurance. I recommend upgrading your fire insurance to Homeowner’s insurance because there are many additional risks that fire insurance does not cover. Fire insurance covers loss due to fire and that’s it. The lender will not fund your loan until a Certificate of Insurance has been delivered to escrow. Besides, it’s a just good idea to insure your home.
A lot of buyers wonder why lenders require fire insurance, especially in Los Angeles where there are Earthquakes as well. This is for two reasons, one fire insurance is much less expensive than earthquake insurance, a typical annual premium for fire insurance may cost $800 per year where as earthquake insurance might be an additional $2,500-$3,000. The other reason is fire is the most common cause of property destruction.
How common are fires? More than 1,000 home fires are reported on an average day. That’s one every 85 seconds! Home fires kill seven people per day.
1 out of every 310 households reports a fire each year.
Aside from the damage of the fire itself, smoke can ruin parts of the home that were unharmed by the flames. Methods used to contain and extinguish the fire, such as spraying water from fire hoses or using flame retarding chemicals can cause more damage to the property than the fire itself! These are just a few reasons fires can be so destructive.
Improvements in firefighting methods and home building techniques have dramatically lowered the number of fires each year in the US.
there are more than two million California homes at high risk for wildfire danger – a number that constitutes nearly 15% of all homes statewide.
Homeowners in “Very High Fire Hazard Severity and Wildland Area Forest Fire Risk” Zones, or as I call them High Fire Zones, may have difficulty finding fire insurance.
The Natural Hazard disclosure statement that you receive as part of your disclosures in escrow will indicate whether you are in a high fire zone. Hillside homes in Los Angeles always are. Being in a High Fire Zone means paying a higher premium for fire insurance and experiencing some difficulty when finding an insurance company who will cover you. A lot of Homeowners like to bundle their car insurance and home insurance together to get a discount- you might be disappointed that your current car insurance provider (GIECO, Progressive, AAA, Travelers, Mercury) will not insure your hillside property for fire insurance. A lot of California insurers pulled out of fire insurance after the devastating Malibu Wildfires in 2007.
No matter how high your property’s wildfire risk, you can always get fire insurance through the state of California under the Fair Plan enacted in 1968. The Fair Plan was created to guarantee that all CA home owners can get fire insurance. The Fair plan covers dwelling but does not cover contents, liability, or loss of use. Fair Plan insurance rates are low, maybe only $500 a year, but that’s because it offers so little coverage.
Fair Plan insurance is better than nothing, but if you are only carrying Fair Plan insurance you are under-insured. The Basic Dwelling Coverage is Fire and Lighting, and Internal Explosion and That’s it. Extended coverage adds windstorm, hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, and volcanic eruption for perils insured against. Vandalism or Malicious Mischief may be added to the policy. No Mudslide or Flood. No Liability Insurance whatsoever. Limited Personal Property (10% of value) and Limited Fair Rental Value also known as loss of use (2 weeks!). You can increase the coverages on these two if you wish.
Some insurance companies provide extensions on top of the Fair Plan that increase the coverage for . You will be best off if you get an insurance company that will write you a homeowner’s policy (State Farm, Allstate), but if you can’t find one or decide those who will are too expensive (Lloyds of London, Pacific Securities), getting the Fair Plan and adding coverage might be your best option (Farmers).