Juggling Fire Issues

By Dennis V. Montalbano

You, fire victims, are dealing with so many challenges–you are juggling fire issues every day. If you feel overwhelmed, you’re not alone. The emotional trauma of fleeing the fire and losing your home is real, and being in a weakened state is not good for making important decisions. Yet, good decisions are exactly what you need right now. One mistake is making plans based on only one dimension of the problem, instead of taking into account the full range of factors. The situation is complicated, and understanding how the major issues interact is critical to the quality of your choices.

Consider these 5 major areas of concern:

1. Insurance
2. Rebuilding/Replacing the Home
3. Mortgages
4. Taxes (Income and Property)
5. PG&E Cases

All of these are potentially relevant and significant–and they’re all interconnected. Let’s look at these issues and consider how they weave together to impact your future.

Insurance

Insurance is the first thing many fire victims turn to after finding temporary shelter. The idea that insurance will make things better is a source of hope, but many of you are getting a painful education in the realities of the insurance world. There is a big gap between insurance expectations and actual checks in hand. United Policyholders of San Francisco is the leading organization in the nation educating and advocating for fire victims. If you are not familiar with the UP website (uphelp.org), check it out.

Your relationship with your insurer is a combination of a contract and a set of state laws and regulations. The contract is your policy agreement, but you had probably never seen it before the fires hit. Insurance companies don’t normally give homeowners copies of their policies, they just send you your Declarations Page and a few supporting documents. The Declarations Page shows basic information about your policy, such as your coverage types and limits. This is fundamental, but it is not your policy agreement. If you haven’t done so already, ask your insurance company for a copy of your policy and read it.

Understanding your policy is a priority, but it’s not the whole story. California is a leader in laws that regulate insurance companies and protect homeowners. Insurance companies like to focus on the terms of the policy agreement, because they wrote them, and because they tend to limit their obligations. They won’t educate you about applicable laws, especially the ones that benefit you by increasing or clarifying what insurance companies are obliged to do. You have to educate yourself. In addition to United Policyholders, you can learn a lot from the California Department of Insurance (insurance.ca.gov), and, if your circumstances warrant it, you should consider consulting with an attorney who has experience with insurance law.

The process of building up your insurance claim can be exhausting. Be thorough and patient. Document all communications. Advocate for your position if you think the adjuster is not treating you right. For example, you don’t have to accept the adjuster’s position on the valuation of losses, you can get appraisals or other information to build up your opinion of value. There are many twists to the challenge of making claims that will maximize your insurance recoveries. A key point you have to understand is that all insurance issues have time limits on them. There are time limits within which parties must respond to each other. There are time limits within which all benefits under a claim must be paid. And there are time limits within which lawsuits must be filed if you conclude an insurance company has acted in bad faith.Understand the start date of your statute of limitations or other important time periods; understand what can sometimes pause the clock or extend the deadline; and know for sure when the deadline really is, because, if you don’t, your claim may be water under the bridge before you are satisfied, and you don’t want that. You can’t take your eye off insurance, but you have more to handle.

Rebuilding/Replacing Your Home

Are you going to rebuild or replace your home? This is a pivotal question, but how do you know what to do before the insurance claims are settled? For many people, rebuilding just doesn’t make sense and it’s time to move in a different direction, but for others rebuilding is part of the healing process and it is not even a question of course we’re going to rebuild! Wait, you don’t have to rebuild to replace your home. Under California insurance law, you can replace your home by purchasing another one. For many, this will be the best path forward. Still, constructing a new home on the site of the old home is what a lot of fire victims will do.

If rebuilding is the plan, keep in mind some underlying basic facts. The first is that economics is not on your side. The supply and demand of labor and materials is radically changed from the situation before the fires, and that means higher prices. So many people trying to rebuild at the same time, and there are simply not enough contractors in the area to do the job. That drives up prices, especially labor prices, and, naturally, it attracts out-of-area contractors. Contractors will get overextended, and many projects will take longer than expected. If you have replacement cost insurance coverage, you only have so long to collect the full policy amount, so you have to do enough construction before the deadline to get as much coverage as possible. That time period is 2 years, but there is a lot of political pressure mounting to extend it by statute. Whatever the time period ends up being, this is a good example of tying your insurance understanding to your construction decision-making.

Using a reliable and reputable contractor is the best path to successfully rebuilding, but having (and understanding) a good written agreement with your contractor is also very important. Permits and fees at the county or city government level must also be dealt with. Local governments are trying to respond to the flood of applications for construction projects, but there is only so much they can do. Depending on the nature of the house you are rebuilding, it may be a good idea to use design professionals, like architects and engineers, to help run the project.

It’s clear that many fire victims will not be able to rebuild what they lost. Requirements that were not in place when the old home was built, such as environmental and fire safety regulations, generally won’t be waived. For example, you certainly cannot build a new fireplace in your rebuilt home, but you definitely have to install fire sprinklers. If you live in the country, you may have to meet Wildland Urban Interface (WUI) standards or upgrade your access road. Finally, there is the question of financing the project. A few can afford to pay construction costs out of savings, but most will try to use insurance proceeds or bank loans, or some combination of the two. This is up in the air, but don’t leap to conclusions yet, there’s more to consider.

Mortgages

What about your mortgage? You still owe it even though your house is gone. Your bank is probably also a named insured on your policy, so you may have received a large insurance check, but it’s made out to you and your bank. You can’t just cash it and run away, tempting as that may be. It’s probably sitting in an escrow account and you need the bank’s agreement to take money out. If your insurance proceeds are large enough, should you pay off the mortgage or keep it? It depends. If you are not planning to rebuild, you might just sell your lot, pay off the mortgage, and move on. If you are going to rebuild, your interest rate and your ability to qualify for new loans are considerations. Will your insurance proceeds be enough to pay the cost of rebuilding? If yes, and you want to do it with insurance money, the bank will monitor your project and dispense the funds in stages as construction proceeds. An alternative is to pay off the current mortgage and get a construction loan, assuming you can qualify for one. The construction loan is then transformed into a conventional mortgage when the project is complete. One advantage of this is that you stop paying interest on your old mortgage during the time you are designing and building your new home. This can be a substantial savings. Construction loans are becoming more available in fire areas as the banking industry (and perhaps the government) responds to the situation. If your existing mortgage is at a high interest rate, then that makes the construction loan route more attractive. If you have a low interest rate on your mortgage and you think rates are going up, then that could be an argument in the other direction. Dealing with your mortgage is not the biggest challenge you face, but you have to integrate it into your overall plan.

Taxes

Taxes are another ball in the air which, if you don’t watch carefully, can land right on you. Two types are relevant: income taxes and property taxes. Income tax possibilities include gains, losses, or neither. Tax gains can cost you money; tax losses can save you money. You may have neither, but you better know which group you’re in. Calculating gains and losses starts with your basis, which for most people, is what they paid for their home, plus improvements. Your insurance proceeds may be taxable. You have a gain if your insurance proceeds are more than your basis. You have to report gain in the year you get it, but you can postpone paying the tax on it for up to 4 years for your personal residence. If you replace your home within 4 years, you may avoid having to pay tax at all. You may also be able to exclude $250,000 of the gain ($500,000 for married couples) if you qualify to exclude gain generally based on how long you lived in and owned your home. All of this applies to personal residences. For rentals, the replacement period is 2 years, and for personal property there are no tax gains to worry about. Losses, known as casualty losses for fire victims, are the difference between the expected insurance and other compensation you get and your basis or the decrease in value of your property (whichever is less), with some other limitations. You do get to include losses on personal property in calculating your total casualty loss. If you have a loss, you can protect other income from taxes. You can even carry losses back to prior years and get refunds and carry losses forward to protect future income from taxes. This is a little bit tricky, so talk to a CPA or another tax professional to understand whether you have a gain and loss.

Then there are property taxes. Your property burned down, but yes, you still owe property taxes. Counties will drop property taxes for structures that were lost, but not for the land portion of your bill. Normally, when you do new construction, the cost of construction is added to your assessed value and your property taxes go up, but things are different for fire victims who rebuild. If you rebuild a similar structure on the same property, the county assessor will allow you to keep your old assessed value, which means you will have new construction with your old property tax bill, which might be very low. Nice, but what is a similar structure? It’s something that doesn’t exceed the square footage of the old structure and is of similar construction quality in the eyes of the assessor. If you build something bigger, or in a higher construction quality category, your property tax bill will increase. Check with your county assessor before you build.

You can also take your old assessed value with you elsewhere. If you replace your home in the same county and the market value of the new property is not more than the market value of the old property before the fire, then you can transfer your old assessed value to the new property. So, in this case, your property taxes will be the same as they would have been on the old property if there had been no fire. You can also transfer your assessed value to replacement properties in some other counties. A few counties in California will allow you to purchase property there and will assess those new properties not at the new purchase price, but will allow fire victims to transfer their old assessed values to the new properties. Those counties include Sonoma, San Francisco, Los Angeles, and some others. So, here we see tax issues impacting the rebuild or replace question. As you can see, taxes are something else to keep track of.

PG&E Cases

PG&E is really in the news in Northern California (as SoCal Edison is in SoCal). Fire victims need to understand what these cases are all about and whether to get involved. First, the law of California holds utilities responsible for wildfires they cause. PG&E knows the rules that apply and makes business decisions about how to manage their operations, including how much insurance to buy for this risk. Each fire will have its own determination of liability and PG&E may be liable for some fires and not others. There are two possible legal theories of liability: negligence and inverse condemnation. Negligence is when a certain standard of care is not lived up to. For example, if PG&E didn’t maintain its equipment properly or didn’t adequately manage vegetation near wires, they may have been negligent. If PG&E was negligent, then they’re liable. But negligence is not required to establish liability because of the inverse condemnation theory. Inverse condemnation is more complicated, but if PG&E equipment was involved in the fires, and the fires would not have happened as they did in the absence of PG&E equipment, then there may be inverse condemnation liability.

Once liability is established, then the question becomes what are the damages? Damages will vary from person to person, but the starting point for most people will be their uncompensated losses, which generally means losses not covered by insurance. For example, if one’s loss is $1million and insurance pays $600,000, then the PG&E claim would be $400,000. This is no small thing considering most homeowners are underinsured. Quantifying losses and negotiating settlements with PG&E will be a massive task, but, once liability is established, it has to be done because the alternative is that your community itself is impoverished to the extent of uninsured losses, and that’s billions of dollars worth.

The North Bay is in the midst of an unprecedented frenzy as lawyers aggressively seek clients for the PG&E cases. Attorneys from all over the country have arrived and there is great pressure on already-stressed fire victims. Some attorneys have experience litigating cases like this against PG&E; some don’t. All offer contingent fee arrangements, which means the attorneys invest their own money to build the cases, then they take a percentage of any recovery from PG&E. Percentages and other terms vary, as does the quality of the lawyers involved.

Should you join the cases against PG&E? For many of you, yes. For some, no. If it is certain that you’ve been fully compensated for your losses from your insurance company, then there is probably nothing to be gained from a case against PG&E. If you have not been fully covered by insurance, then you should consider it. In one sense, you have nothing to lose. If the case is unsuccessful, it didn’t cost you anything. If the case is successful, then you’ll receive a check someday and it might help you rebuild, pay down some debt, or do something else. One thing that tends to drive people to the cases is the fact that the insurance companies themselves are seeking compensation from PG&E for what they paid to homeowners. Fire victims who sue PG&E will be paid first, but after that, insurance companies can seek to recover what they paid to fire victims. Can you imagine your insurance company collecting for your loss when you don’t? Each fire victim’s situation must be evaluated individually to determine whether a case against PG&E (or SoCal Edison) is a good idea.

Summary

The author of this article is taking clients for the cases against PG&E. In the process, it has become clear that one cannot engage with fire victims without understanding the many complex issues they face, and wow, what set of issues they are. There are many balls in the air, and we’ve looked at most them here. It’s easy to become mentally overloaded, but if you make decisions when you aren’t aware of all of the factors involved, you may find later that they were bad decisions, and you may wish you had really thought things through more thoroughly.

You had to find a new place to live and you’re adjusting to a new reality. You’re having an unfortunate education about the world of insurance, and it can be very frustrating. You have decisions to make about rebuilding or replacing your home and how to pay for it. You still have your mortgage to deal with, and now you know that there are many tax aspects to consider as well. Meanwhile, there are these cases brewing against PG&E. You never saw yourself as a fire issue juggler, but that’s what you are. What you really need is a vacation. Putting your life back together is not going to be easy, but what choice do you have? We can’t go back to the world as it was before the fires. We have to build a new world, so let’s make it a good one. Understanding and balancing all the competing factors involved is the way there.

Dennis V. Montalbano, Attorney at Law,
(707) 942-0750, Dennis@BerrymanMontalbano.com