Insuring Against Natural Disasters
August 28, 2009
Homeowners insurance can protect you from many of life’s calamities, but your policy doesn’t shield you from all of the tricks Mother Nature has up her sleeve. In fact, standard policies specifically exclude most natural disasters.
In some areas of the country, where the risk is higher, hurricanes and earthquakes are often exempted. Some policies may cover flooding from rain, but exclude water damage from tidal surges, which can be a far greater threat. Enter disaster insurance, which covers losses sustained from specific catastrophes that traditional homeowners policies avoid.
While supplemental disaster coverage is usually available to at-risk property owners, buying a policy isn’t always a no-brainer. The high premiums and deductibles, and low chance of a disaster actually striking your home, give reason for pause. Before calling your agent consider your risk-tolerance, and conduct your own personal cost-benefit analysis.
Flirting with disaster insurance
Before you begin shopping around for disaster insurance, you need to look at your existing homeowners policy to determine which events are covered and which are excluded, says Larry Cochran, CEO of IAS Claims Services, an independent claims adjusting firm in San Antonio, Texas. Read all of the endorsements carefully. If you still have questions, call your insurance agent for answers.
Once you understand what’s already covered, you need to evaluate the specific disaster risks where you live. The office of your state’s insurance commissioner is a good place to start. The Federal Emergency Management Administration has information about various types of natural hazards and data on the history of disasters in various regions. The National Flood Insurance Program offers flood maps and guidelines for evaluating risk.
Depending on the region where you live and risk you’re trying to cover, you may be able to find insurance for specific disasters through a traditional carrier. For high-risk areas, many states have so-called residual markets, which are subsidized insurance pools to provide coverage. The NFIP is a federally run program that offers flood insurance to homeowners in most risk-prone communities.
It’s important to check out the company that will be insuring your home, says Illinois Insurance Director Michael McRaith. Talk to friends and neighbors about their experiences with their carriers. Also visit the website of an insurance rating company like A.M. Best to see how various carriers are rated. (Free online registration is required to access insurers’ ratings.) The higher the rating for the insurance company, the more financially stable it is.
Timing too is important when it comes to disaster insurance, since flood insurance may have a 30-day waiting period before it goes into effect. “Trigger” events may also limit your options in the case of storm damage. According to the Insurance Information Institute, these triggers vary by state, but once a tropical storm is named, a hurricane watch is declared, or a hurricane’s intensity is defined, newly issued policies won’t be available to cover that particular storm.
Putting a price on extra coverage
The cost of your insurance may vary greatly depending on the size and type of your home and your geographic location, as well as the type of disaster you’re insuring against, ranging from a few hundred to several thousand dollars annually. However, the size of the premium must be weighed against the cost to repair or replace your dwelling and its contents after a disaster. For example, according to the NFIP, the average flood insurance policy costs $540 per year; the average flood claim over the past 10 years was $33,000.
Earthquake coverage usually costs between $1.50 and $3 per $1,000 of coverage on the structure per year. So, for example, $300,000 worth of coverage would usually run between $450 and $900, with a typical deductible of 5% to 15% of the home’s insured value. So if your home was insured for $300,000, you would be responsible for the first $15,000 to $45,000 out of pocket before your coverage would apply. There may be separate deductibles for a home’s structure vs. its contents.
Coverage of hurricane and wind damage can vary greatly. In some areas, it’s part of a typical homeowners policy. However, 18 states have additional hurricane deductibles that can range from a flat fee of a few hundred dollars to as much as 10% of the home’s insured value, depending on the risk level of the area. In situations where you have an option to choose a deductible, realistically evaluate what you can afford to replace on your own, as the higher the deductible, the less the insurance costs in most cases.
There’s no definitive way to know whether you should buy disaster insurance. Beyond where you live and what your homeowners policy already covers, the decision needs to take into account factors like your individual comfort with risk and how you’d spend the money you save on premiums. If you never drink milk past the expiration date or cross the street without looking both ways, then skimping on disaster insurance might not fit your personality.
But if you do decide to take a pass on disaster insurance, make sure you have access to a rainy-day fund, line of credit, or a rich uncle just in case the worst comes to pass. That’s especially true if you have a lot of equity built up in your home.