How to keep a natural disaster from becoming a financial disaster

A natural disaster does not have to be a financial disaster, too.

Estimates of damage caused after Hurricane Sandy ravaged the East Coast have run as high as $60 billion. CPA personal financial planning experts say that taking the right steps after a disaster can help people protect their surviving assets and rebuild successfully.

Mitchell Freedman, CPA/PFS, is a California-based financial planner who has seen his home sustain significant damage in the Northridge earthquake in 1994 and a fire two years ago. He said CPAs should recommend that clients take three initial steps with regard to a damaged dwelling:

1. If there is a question about whether the home is inhabitable, contact local building authorities for a decision.
2. Contact your insurance company to establish a claim, but do not settle immediately.
3. If you are able, make temporary repairs to prevent further damage. This could include placing tarps over broken windows or having a professional put a tarp over a hole in your roof to keep rain from coming in.

Freedman said victims must resist the urge to quickly accept a settlement from their insurance company. Victims who are not experts in construction might need the advice of professionals to determine what it will cost to repair the house.

After his home was damaged in the fire, Freedman said, he even hired a public adjustor to deal with his insurance company. Freedman said his payment to the adjustor, who received a percentage of the insurance settlement, was more than offset by the amount that his settlement increased as a result of the adjustor’s experience working with insurance companies.

“My advice is, don’t settle things with your insurance company until you have a total handle on what your losses are and what the replacement costs are that you’re going to have to deal with,” Freedman said.

It’s also a good idea to advise clients to wait until they know the amount of their insurance settlement before hiring a contractor, Freedman said. Otherwise they might enter into a contract for repairs that they will not be able to afford.

Dealing with contractors

When it’s time to hire a contractor, clients should be advised to consult friends, relatives, and neighbors for recommendations, according to Theodore Sarenski, CPA/PFS, a financial planner in Syracuse, N.Y., who is a member of the National CPA Financial Literacy Commission.

Sarenski said homeowners should initiate the inquiries with contractors they have researched rather than responding to sales pitches of contractors who contact them. In some cases, unlicensed contractors move into disaster-affected areas and go through neighborhoods trying to arrange for work; they should be avoided. Better Business Bureau reports can help assess the reliability of contractors, and any contractor who is hired should be licensed, insured, and bonded.

“You don’t want any liability on your part,” Sarenski said. “Should they be hurt on the job, you want to make sure that they’ve got coverage, that you’re not liable, because you as the homeowner would be if they’re not insured.”

It’s best to get bids from three contractors, said Terry Seaton, CPA/PFS, a financial planner based in Florida and a member of the National CPA Financial Literacy Commission.

“That bid process will educate you,” Seaton said. “When they come out and you talk to them about the problem and the options to fix it, and you go through that discussion with three different contractors, you’ll learn a great deal about what’s going on with the damage, and you should have a pretty good feel [for what repairs are needed].”

Once repairs begin, Seaton said, it’s a good idea to closely and frequently inspect the work to ensure the contractor is performing the job he was hired to do.

Looking ahead

CPAs interviewed for this story say that the hurricane can serve as a reminder to clients to prepare financially for potential emergencies and disasters by:

• Making a photographic or a video inventory of their valuables for insurance purposes. Jewelry, antiques, valuable collections, and electronics are among the items that should be included.
• Protecting important documents such as marriage and birth certificates, car titles, and insurance policies in a locked, fireproof, and water-resistant location. Backup copies of documents also can be scanned and placed on a flash drive to be stored in a bank safety deposit box. Contact information for important people such as lawyers, CPAs, and insurance agents also can be placed on the flash drive.
• Carefully assessing whether insurance carried is appropriate for the risks faced in a specific area. Insurance for floods and earthquakes is not included on many homeowner policies and may need to be purchased separately.

“People really have to make a decision as to what risks they are willing to accept on their own, what risks they’re willing to buy down a little bit with high-deductible insurance policies, and what risks they want to pretty much transfer to an insurance company almost in total,” Freedman said. “And once they make that decision, of course, the more of that risk that’s transferred to the insurance policy, the higher the premiums are going to be.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.