In the Line of Fire
by Paul Keegan

January 10, 2008

[Continued, page 2]

The first week was like one long day. Kevin wore the same clothes for five days. Nicole was numb. The girls were disoriented, and Haley kept saying, "I want to go home." They went to Target to buy underwear. They moved to a Marriott hotel for two weeks, then into a two-bedroom apartment (Kevin's mom is house-sitting nearby). In all, they spent $2,000 those first two weeks on hotels, clothes, toiletries, meals and odd expenses like getting the ash washed from their cars.

But money wasn't a problem at first. Within a week of the fire the Red Cross provided $1,300 in emergency funds, a Buddhist relief agency gave them $300, and they got $5,000 from their insurer to start replacing their belongings. For every financial hit they took, someone stepped up to help. Kevin took eight days off from work, but co-workers donated their vacation days to cover it. Nicole lost all her samples of window blinds and shades, but her suppliers replaced them at little or no cost. A friend dropped off two suitcases of sweatshirts, pants and other clothes.

Best of all, despite the horror stories the Martins had heard about people fighting to get settlements after a disaster, the checks from their insurer kept coming. Just over two weeks after the fire, the Martins received $785,000 to rebuild the house, $245,000 to replace their belongings and $102,000 for living expenses during the time it would take them to rebuild.

But their delight quickly turned to dismay by mid-November after they spoke with George Kehrer, head of the nonprofit Community Assisting Recovery (CARe), a consumer-advocacy group for disaster victims. "It was a real eye-opener," says Kevin. Upon reviewing the Martins' situation, Kehrer concluded that they were underinsured by at least 30% to 40%. The $785,000 they received to rebuild their home, while close to their policy limit, works out to about $175 a square foot. But, Kehrer says, constructing a custom-built house on a hillside in their neighborhood typically runs $250 to $300 a square foot, based on estimates from local builders. That would put the tab for rebuilding closer to $1.1 million to $1.35 million. And he estimates that the cost of replacing their belongings might be twice as high as the $245,000 the insurer sent them.

Kehrer says disaster victims like the Martins are in a state of shock and just grateful to get help. "If the insurer cuts a check quickly, most people never raise an eyebrow," he says. "They've never seen a check that big. Later they realize there's no way they can rebuild for that price."

THE ADVICE

MONEY asked Kehrer and Schweiger, the financial planner, to offer the Martins advice about how to begin rebuilding and get their financial lives back on track. Here is what the experts suggest:

PUSH FOR A BIGGER PAYOUT Under the terms of their policy, the Martins are entitled to get as much as $489,000 to replace their lost possessions vs. the $245,000 they received—if they can document that what they owned was worth that much money. Since the couple didn't keep an inventory of their belongings, they should put together a detailed list of the clothing, furniture and assorted other items they lost, then try to recreate documentation. They can, for example, get records of their purchases from stores and credit-card companies and also provide their insurer with photos of their possessions taken during the recent reappraisal.

The Martins could also qualify for an additional $196,000 in reimbursements apart from the house. Walkways, fences and similar structures, for example, are covered separately, for up to 10% of the $652,000 policy limit; upgrading the new house to meet current building codes could net them another 10%; debris removal could add up to 5%; and landscaping work is also covered up to 5%.

Kehrer says that the Martins even have a chance of getting compensation beyond their policy's stated benefits if they can make a case that they had good reason to believe they'd be fully covered when they bought the policy and show how much more rebuilding is likely to cost than the insurer's estimates. The first step, Kehrer says, is to get the "scope-of-loss report," which details how the company arrived at their payout; then hire a reputable contractor to render a second opinion. This might cost as much as $5,000, but if an independent assessment concludes it would take far more than $785,000 to rebuild, the insurance company might up the payout, Kehrer says. (Farmers declined to comment on the Martins' case, but a spokesman says the settling of claims is an "ongoing process" and confirms that the company is open to negotiation even after its initial checks have been cut.)

HOLD OFF ON REBUILDING As eager as the Martins are to get going on a new home, Kehrer urges them to postpone using the insurance money they've gotten until they finalize their settlement. Not because cashing the check would close the case—in California, homeowners have two years to dispute a settlement—but because disaster victims can't make smart decisions about what type of house to build until they know for sure how much they'll have to pay for it. If they were to forge ahead now and later win a larger settlement, the Martins would have wasted time and money on construction plans they'd probably end up scrapping.

SLASH THE MORTGAGE DEBT Even before the fire, the Martins were living dangerously because of the staggering $1.2 million they're carrying in mortgage debt. Says Schweiger: "If, say, Kevin were to get laid off, they'd really be in trouble."

The best way out: Sell the Hard Rock Hotel suite, Schweiger urges. After paying off the hotel mortgage, they'd still have $290,000 left, which they could use to pay down nearly a third of their home mortgage. That would save the family $1,300 a month, making it much easier to stay on top of their bills and set more money aside for emergencies (the goal, Schweiger says, is to boost their short-term savings from $20,000 to $50,000). Bonus: They wouldn't have to worry about how they'll pay the Hard Rock mortgage if bookings of their suite fall short of expectations.

SPREAD THE WEALTH Schweiger wants to make sure the Martins don't neglect their long-term goals as they struggle with their current crisis—goals like putting the girls through college and retiring by age 55. But, he says, those plans are threatened by the lack of diversity in the Martins' portfolio, which puts them at risk of higher-than-average losses if the market turns against them. About 70% of their individual stocks, for instance, are in shares of Qualcomm, Kevin's employer, making the family's financial fate too closely linked to the fortunes of one company. And nearly a third of Kevin's 401(k) is also in individual stocks.

A better idea, says Schweiger: Dump the individual stocks in the 401(k) and stick with a mix of mutual funds—80% in equity funds and 20% in fixed income. And while buying Qualcomm stock makes sense because Kevin gets a 15% employee discount, he should sell those shares quickly and reinvest the money along the same lines as his retirement account. Assuming the investments earn historical rates of return and the Martins keep saving at their current rate, this plan should enable them to retire at 55 and pay the $275,000 or so that it will likely cost to send Emily and Haley to a public college.

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The opinions and views expressed in this publication are for general information only and are not necessarily those of Mutual of America Life Insurance Company.

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