I just listed a house for sale in south Palo Alto. Well, it isn’t a house, really, at least not any more. You see, the house was essentially destroyed by a fire. The good news is that nobody was hurt. The bad news is that the house has to be demolished and completely rebuilt.

But that is only part of the story. My clients originally had planned to rebuild the house themselves. Even though they have not lived there for over 20 years, they are sentimentally attached to it because that is where they raised their children before they moved to their current home. But it quickly became apparent that the house was underinsured and the insurance payment did not even close to covering the cost of rebuilding.  In additon to being underinsured, the policy did not include “code upgrade” coverage.

Because the house is in a flood zone, local regulations now require that the foundation has to be raised at least 3 feet to minimize the potential for future flooding. In addition, there have been many other code upgrades since the house was originally built some 50 years ago. All of these code upgrades substantially increase construction costs over and above the amount covered by their insurance. And so, they are forced to sell.

There are two insurance endorsements that could have prevented their loss… inflation protection and code upgrade coverage. If you do not have these two endorsements in your existing policy, pick up the phone right now and call your insurance agent. In addition, be sure to review your policy coverage every two or three years to make sure the coverage remains in line with the current conditions. Do not count on your insurance agent to call you. It is important to be proactive to protect your investment.