Tax and financial advice from the Silicon Valley expert.

Lessons From Our Fire Recovery Experience

Our family home was destroyed in a fire two days before Thanksgiving, 2015.  On November 29, 2018, we sent the final payment to the fire restoration company, three years after the destruction of our home.  (The restoration was finished during September, 2018 and we received the final payment from our home insurance claim late November, 2018.)  I thought readers might be interested in what our experience was like and the lessons that we learned that might help other victims of fires and to prepare for the possiblility of a fire or other disaster.

First, we had enough insurance to cover most of the cost of restoring our home and personal property.  The process of getting those benefits was rather horrific, but we got through it without the help of a public adjuster.  I’m not certain that “everyman” could.  Since I am a CPA with business management experience and my wife, Janet, understands home design, we were able to manage the process with a lot of help.

What is a public adjuster?  A public adjuster is a company that helps people who have suffered disaster losses to get the maximum recovery from their insurance company.  For this service, they receive a hefty fee.  I understand it’s 5 – 10% of the total recovery.  For some people, this is a worthwhile investment.  We were able to get the policy limits for our recovery, so we were fortunate to get through the process without a public adjuster.

It’s probably a good idea to review your policy benefits with your property insurance agent to really understand your coverage.  I understand some people have lost their coverage after making a claim like this.  So far, our property insurance company is continuing ours.

As I watched our home burn, a representative from a fire recovery company put his arm over my shoulder and reassured me, “Mike, I’m going to rebuild a beautiful new home for you.”

I asked him, “Can you have the rebuild done by next Christmas?”  He reassured me that he thought he could.  I might not have given them the job if I knew in advance that it would take almost three years!

We spent the night of the fire sleeping in my daughter’s front room.  It was one of the most miserable and uncomfortable nights of my life.  The next week or so our insurance company paid for our lodging at a Residence Inn, which was great.  The Residence Inn provided breakfast and a Happy Hour buffet on several nights, so we didn’t have to go out for dinner on most nights or for breakfast.

Our homeowner’s insurance policy provided living accomodations replacement for two years, so we shortly moved to a furnished rental home located close to my daughter’s family.  My granddaughters thought it was great that Grandma could walk and pick them up from school.  The insurance also covered additional living expenses, including some meals and additional mileage to commute to work compared to our regular residence, and duplicate expenses for utilities and garbage.

It’s very important to keep good records during this process to identify duplicate living expenses, including the utilities costs for both your regular residence and the rental residence, to get reimbursements for duplicate expenses.  (In Santa Clara County, garbage  pickup is included on the real estate tax bill.)

When our two years was over, the insurance company informed us they would no longer cover the rental for the home.  The rebuilding of our home was only about half done.  There wasn’t even a front door and no furnace for heat!  We moved into our unfinished home and slept on the (unfinished) floor using inflatable mattresses.  There was one working sink and one working toilet.  We lived in our home while the restoration company finished rebuilding it.

Your property insurance agent does not handle your fire loss claim.  The insurance company assigns adjusters to do that.  We had separate adjusters for the building and for personal property (furniture, clothing, etc.)  The adjuster might be an employee of the insurance company of an independent contractor.  A big irritation in this process is the insurance company routinely rotates adjusters off cases every few months.  This means your file is neglected for some time and you have to get another person up to speed.  We kept in touch with our insurance agent to act as our advocate with the company to keep the momentum going processing our claim and reduce the rotation of adjusters on our case.

The initial two people that we worked with at our restoration company were actually very helpful.  One of them had previous experience as an adjuster for a property insurance company.  They gave us some coaching about the process and how to deal with our property insurance company.  The other one actually wrote some software for us to make it easier to make the list of personal property lost in the fire.  This was enormously helpful.  With his software, we could look up items on the internet to give references for replacement costs and where they came from.  These people left the company, one about a year after our loss when we made the initial personal property loss report and the other a few months before our house rebuild was finished, requiring us to get another representative up to speed to finish the job.  This created more inconvenience because he wasn’t familiar with our case.

Recreating our personal property list was a huge job.  It required listing in detail all of the items in each room of the house.  I have a pretty good memory and can summon a picture of what was where.  Not everyone is so fortunate.  My wife, Janet, walked through stores looking at the shelves for items that we lost, taking picture of items and their prices with her smart phone.  Although the personal property adjusters said to focus on the high value items, small value items really add up.  Looking back, it would have been great to have photos or videos as a tour of the house showing everything.  We had CDs of our photos that weren’t kept outside the house in a safe deposit box, so they burned.  Now many people are putting photos and documents “in the cloud”.  A good idea!

Again, be sure to keep your receipts for replacement items, including clothing, towels, razors, toothbrushes, toothpaste, etc.  You also have to list in detail what the receipts are for.  (For example, state if out bought the Phantom of the Opera DVD.)  You might need to attach your receipt to a separate piece of paper with a list of items purchased with the amounts.

Initially, our policy paid for the depreciated value of items.  It paid for replacement cost when we provided copies of receipts and the items were purchased within two years after the fire.  Those receipts are the documentation of the cost of the replacement items.  They can also be important income tax records.  According to the rules for involuntary conversions (such as a fire), if there is any gain from the insurance recovery, it isn’t taxable provided the item is replaced for at least the amount recovered.

Since the rebuild of our home wasn’t done in two years, we ordered some furniture with delayed delivery and put appliances (dishwasher, refrigerator, washing machine, dryer, microwave oven, stove, trash compacter) in the garage.  We couldn’t delay the delivery of some furniture that we bought at a consignment store (a great source for antique/wood furniture!) so we just had them put it in our unfinished home.  As we approached the two year date, our personal property adjuster made an extra effort to come to our home and help us assemble the information so that we reached our policy limit.

We had to replace many documents, like vehicle pink slips, passports, social security cards and birth certificates.  The cost of replacing these items were included in our insurance claim.

Rebuilding our home was like a slapstick comedy.  There were many miscommunications leading to many false starts.

The restoration company was able to make an accurate model of our home, using laser equipment.  Too bad the architect ignored the model.  You’d think the plans might be on file with the City of San Jose.  Nobody got them.  Some of our neighbors have homes with the same exterior and floor plan as ours.  Nobody bothered to check them out.

There were several errors in the plans prepared by the architect.  The architect was not located near our home.  Each time the plans were changed, they had to be approved by the City of San Jose building department.  In some cases, it took months to get the approval for the changes.  Building would usually stop when waiting for the approval.  Finally, we got to the point of harassing our restoration company to get changes processed more quickly and to expedite getting approval by the City of San Jose.

Some examples of the plan corrections:

  • We have an open staircase, which gives a very open look when entering the house. The architect’s plan had an enclosed staircase.
  • We have a family room – kitchen, which is one large open room. The architect’s plan had a wall between the family room and kitchen.
  • We have vaulted ceilings in the master bedroom and the front room. The architect’s plan didn’t have vaulted ceilings.  (This required a major change in the “truss” plans for our roof and changes in the ventilation for the HVAC for the house.)
  • The architect’s plan omitted the linen cabinet for the upstairs hallway.
  • The architect’s plan didn’t include the furnace or air conditioning(!)

The architect and the builder didn’t know which codes applied for some items, such as the insulation for the vaulted ceilings, and how the frame for the house is attached to the foundation.  Items like this required rework and multiple inspections.

City inspections also became an issue.  Waiting between inspections resulted in more delays waiting to continue building.  Finally, I called my city council representative and got the direct telephone number for the inspector and was able to expedite having inspections done.

The builder was in a fog about ordering many items.  Janet and I regularly had to go to the hardware store to keep things moving by buying ceiling lamps, faucets, sinks, toilets, cabinet handles, fireplace mantle, etc.

We had turnover of the construction foreman for the restoration company.  The first foreman was great, but left after only a few weeks on the job.  The second foreman was congenial, but didn’t seem to actively manage the job.  There were several items that he said he would take care of, such as ordering floor tile, getting the gas fireplace, and the mantle for the fireplace, that we ended up taking care of ourselves.  More delays!

If we didn’t manage the reconstruction of our home and keep pressing to get the job done, it might have taken two more years to finish it!

I did quite a bit of research relating to the tax rules for an involuntary conversion (replacement after a disaster.)  I recommend that you consult with a tax expert if your home is destroyed by a fire.  One thing to be aware of is that you apply the exclusion for sale of a residence, $250,000 for an individual or $500,000 for a married couple, before applying the exclusion for replacement property, so you get a basis increase from the involuntary conversion of a principal residence.

In summary, you can’t passively rely on others to take care of the restoration of your home, replacing your property and getting the maximum insurance recovery.  You have to pay attention and be actively involved in the entire process, including watching insurance deadlines.  If someone else says they’ll handle it for you, be prepared to pay a hefty fee and be prepared to be disappointed and step in when necessary.

Tax and financial advice from the Silicon Valley expert.