I’ve been meaning to write a post about this for a few days. On Editor’s Roundtable this morning, I heard KPBS’ Alan Ray advocate a rethinking of whether we should rebuild homes in the areas destroyed by the fire.

That’s an interesting debate, but not what caught my attention. What got me was his theory that insurers might try to direct their policyholders to use their insurance proceeds to purchase some of the more than 23,000 homes for sale in San Diego County rather than rebuild. He suggested that it would be a natural transfer. That insurance money could be used to take up some of the existing housing stock and that, hopefully, nobody would rebuild on the fire-prone land where the home was destroyed.

I think Ray was confused by a misperception of home values and insurance that I have heard over and over recently. A lot of people are thinking and talking and postulating that somehow you can look at a home’s market value and determine how much money they’ll get from insurance. That’s just not true.

Most of the value of a house is contained in the value of the land. The land doesn’t burn up when a house ignites. I suppose it may blacken and some of the infrastructure damage, but the land retains most of its value unless it’s somehow cut off from what made it a valuable location.

In other words, you may have a home that’s worth $800,000. But that doesn’t mean that insurance is going to pay you $800,000 if it’s destroyed. Insurance will pay the cost of rebuilding the home.

Take, for example, Cheryl Hamano, who I wrote about in this column yesterday. After her family’s Scripps Ranch home was destroyed in the 2003 Cedar Fire, the family had to wrangle with its insurance company for a year.

They ended up receiving $155 per square foot to rebuild. I didn’t ask how big her house was but let’s say it was 1,800 square feet. That is $279,000. The insurance company also paid for part of their living expenses and other costs while the family waited for workers to finish the home. But add all that up, and it’s nothing close to the actual market value of a 1,800-square-foot home in Scripps Ranch.

“The cost of replacing lost possessions and the home itself is going to be a far different from the market value of the home,” said Tully Lehman, a spokesman for the Insurance Information Network of California.

If someone wanted to move to a new, less fire-prone, neighborhood with the insurance money they receive, they’ll also have to go through the hassle of selling a plot of land with nothing on top of it but the rubble of a burnt-out house.

And only someone who wanted to put a house there would want to buy that plot of land.

In other words, someone may want to move to a less flammable area after losing their home in this disaster, but their proceeds from insurance won’t be one of the incentives.

Now, if the insurers decided not to provide coverage for a newly built home in a fire-prone area, that would provide a disincentive to building there. But I don’t see that happening.

Insurers need California.

“We stayed after the 1991 fire in Oakland. We stayed and provided coverage after the 2003 Cedar Fire. And we’ll say around now. This is a good state to do business in,” Lehman said.


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