Southern Californians only need to look in their backyards to see how quickly and thoroughly a natural disaster can devastate lives and communities. Consequently, the recent Los Angeles-area wildfires have made coverage concerns a peak priority. How we assess and plan for risk is dominating discussions at levels never before seen in our industry.

“Location, location, location.”

We’ve each heard this phrase when it comes to establishing a property’s value. Ironically, many locations that were once considered to be very desirable have become a potential insurance liability, making obtaining coverage expensive and sometimes unachievable.

Extreme weather and natural disaster threats combined with rising reconstruction costs and interest rates have largely caused insurers to back away from covering high-risk properties. This trend actually began more than 30 years ago.

‘Each situation is unique’

Comprehensive planning regularly reminds us that each situation is unique and must be independently evaluated. Among other things, factors such as one’s age, health and personal status are often weighed against insurance benefits, tax liability, time-until-retirement and in the case of Southern California, potential rebuild costs, subsequent insurability and overall life quality. These objectives must be independently evaluated while deciding on the path forward.

Homeowners with a property worth $1 million or more face a multitude of potential challenges, not the least of which is an insurer’s inability to pay or deny claims from a natural disaster. Not that long ago, homeowners were shocked to learn that their policy would not be renewed. While we’re very “exposed” and it has become difficult to attract and retain carriers in SoCal, that “shock” has been pushed aside by larger issues.

Insurance is typically something no one reviews until they need it. If not understanding what’s covered is one of the biggest mistakes homeowners make, a close second is not listing important items that should be covered. We typically advise to shop by coverage, not price. If omitted, there’s a maximum limit on personal property which could be inadequate.

When it comes to coverage, how much will you receive from your carrier for the total loss of your dwelling and associated structures? Will the extended-replacement provision only apply if you rebuild? Is it negotiable? What’s the realistic timing and cost to rebuild? If it’s $1,000-$1,200 per square foot, will policy limits cover anticipated costs? How old will you be when the house is done? Will it fit your projected lifestyle?

Not everyone has comprehensive plans

Our local housing market has become completely dislocated. If many find that their coverage is inadequate or too expensive, this may prompt them to sell their land and not rebuild. Others continue to look for a new place to live and a school for their children. How many will permanently leave the area? How will this impact local markets? Future home values? Urban planning?

When it comes to rebuilding, actual cash value is the amount it would take to repair or replace damage to a home and contents after depreciation. Replacement cost is the amount to replace or rebuild a home or repair damages with materials of similar kind and quality, without deducting for depreciation.

Any added enhancements, such as custom windows may significantly increase replacement cost. In the event of a covered loss, an actual cash-value payout could be thousands less than a benefit calculated at replacement cost.

Here are some points to consider:

• For how long or how much will you receive in loss-of-use proceeds? What happens to the benefit if you sell the land or purchase a new home? Is this negotiable?

• What happens with your insurance benefit if you want to rebuild a different size house than your previous one? One story vs. two? What’s appropriate based on your current life stage? Can you negotiate reimbursement and payouts if you decide to sell your property or build a different kind of house?

• Looking forward, will you be able to reasonably procure homeowners/fire insurance after you rebuild? What are the likely policy limits and potential costs? It’s presently unclear when more information on the future insurance market will be available.

• How do we calculate whether you are eligible for a casualty tax loss or might you experience a potential taxable event after receiving insurance proceeds? Similarly, how does one qualify for a casualty tax loss for personal property?

• What happens if you rebuild and there’s a gap you must fill to complete the rebuild?

• How does one locate receipts for items like furniture and contents that were purchased years ago? Such losses are based on cost and not replacement value.

The best way to remain prepared and poised to accept relief and eventual help post disaster is to be methodical and keep good records. While comprehensive planning typically goes far beyond dollars and cents, there is going to be a greater emphasis on how we view risk management, with what we value and how we protect it in the event of another inevitable disaster.

Jeffrey Fishman is founder of JSF Financial, a Los Angeles-based wealth management firm.