Specialty coverage: Protecting against natural disasters
1887, when the State of New York approved the first homeowners insurance policy,
insurers have covered fire and lightning damage. Later revisions added coverage
for wind, hail, riots and civil commotion, among other perils.
still the basis for most property coverage," says Ben Shiner, of Shiner Lopp
and Smith Inc., a financial planning and insurance agency in New Albany, Ind.
Although coverage has come a long way
in the past 116 years, there are some natural disasters most homeowners policies
still don't cover. For floods and earthquakes, you'll need a separate policy,
says Mark Stevens, public affairs officer with the Federal Emergency Management
Agency (FEMA) in Washington, D.C.
a primer on these policies.
This is especially important in areas
known to be earthquake risks, such as the West Coast and areas of Missouri near
the New Madrid fault. While mortgage lenders typically don't require the coverage
(unlike flood insurance, which is mandated for most homes in flood plains), it
may make sense. A word of warning: It's not cheap.
You can purchase earthquake coverage either through an insurance
company or a state agency. Californians, for instance, can choose between the
California Earthquake Authority (CEA) and private insurance.
Jerry Miller, president of Miller-Robertson Insurance Services
in Novato, Calif., generally steers his clients to two carriers that write only
earthquake insurance, usually at lower rates than carriers that offer a variety
Here's a rough idea of costs. A homeowner living in Miller's community,
which is about five miles from a major fault, would pay about $1,700 annually
for $500,000 in coverage for their home's structure, $350,000 for contents,
$100,000 for additional living expenses and $50,000 for damage to any attached
Before collecting on a claim, the homeowner would have to pay
a deductible. Earthquake insurance deductibles work a bit differently than other
types of deductibles, as they're calculated as a percentage of the value of
the coverage, rather than a flat amount. With a 10 percent deductible in the
above example, the homeowner would pay the first $50,000 -- 10 percent of $500,000
-- before insurance would kick in. Similarly, if the contents were damaged,
the homeowner would pay the first $35,000 or 10 percent of $350,000.
Some policies offer blanket coverage. Instead of separate limits
for the structure and contents, for instance, they might offer a $1 million
policy that covers everything. When that's the case, the deductible is calculated
from the $1 million limit. So, the homeowner would have to cover the first 10
percent, or $100,000, of expenses before the insurance company would pay anything.
More people obtain coverage though the California Earthquake Authority,
says Randy Gridley, president of Gridley Associates Inc., a San Francisco-based
insurance agency. Again, coverage doesn't come inexpensively. Using the online
calculator provided by the CEA,
coverage for the same $500,000 home in the 94947 (Novato, Calif.) ZIP code,
along with $100,000 for coverage of contents, would run about $1,200 annually,
with a deductible of 10 percent.
Does it pay?
Many Californians apparently have decided that it doesn't. According to a recent
study by Martin Grace and Robert W. Klein, both of the Center
for Risk Management and Insurance Research at Georgia State University, less
than 15 percent of them have earthquake insurance.
If you can afford it, the available protection is better than
none. But if your budget is tight, it becomes a question of greater risk. Earthquake
insurance at the expense of disability insurance, for example, may not be a
When you buy earthquake insurance, you're really protecting your
equity and your credit rating, says Gridley. Once you've been in your home for
10 years or so, it isn't unreasonable to have built up $500,000 in equity in
many areas of California. Weighed against the equity you've established, the
coverage may not appear so expensive.
If you live far from a body of water, you may assume you have no need for flood
insurance. Guess again. In the U.S., flooding is the most common type of natural
disaster, says Stevens of FEMA. What's more, a great deal of flood damage occurs
even to homes that are not close to any lakes, rivers or oceans. In many instances,
heavy rains that saturate the ground and seep in to the structures do heavy
Throughout the country, flood insurance is offered through the
National Flood Insurance Program (NFIP), an offshoot of FEMA. The NFIP contracts
with approximately 90 insurance carriers, which sell the policies, administer
the paperwork and service the claims. You can ask your insurance agent if his
or her firm is among them, or you can call 800-427-4661 to get names of agents
in your area.
If your home is located in what the government has determined
to be a "flood plain," any federally regulated lender will require
you to purchase flood insurance before you get a mortgage. You can get flood
insurance only if the city or town in which you live participates in the flood
insurance program. To do that, city officials have to agree to adopt various
regulations, such as restricting new development in flood-prone areas.
How can you tell if your house or lot is in a flood plain and
if your city participates in the flood program? Your lender should be able to
tell you. Or you can check the NFIP
Web site for information.
Even if you're not required to have flood insurance, you should
think about it carefully. And don't let terminology like "the 100-year
flood rule" trick you out of it. "People tend to think that means
once a century, there will be a flood" in their area, says Stevens, but
it really means that in any given year, floodwaters have a 1 percent chance
of reaching or exceeding the base flood elevation level. That same chance exists
While that may not sound like much risk, consider that over the
course of a 30-year mortgage, there's a 26 percent chance that your home will
incur some flood damage, says Stevens. That's five times the likelihood that
you'll have to deal with a fire.
In addition, more regions of the country appear to be at risk
of flood damage, says Klein of Georgia State. "In a lot of areas, we've
underestimated the flood risk," he says. Some people claim that global
warming is to blame; others point to greater amounts of development, which leaves
less undeveloped land available to absorb water.
Another reason to consider flood insurance: You'll probably need
it to be eligible for federal disaster assistance loans or grants to rebuild
after a flood. "If you're in a dangerous location, you can't expect the
taxpayers to bail you out over and over" by continuing to provide aid,
says Stevens. The flood program is designed to be self-supporting, so that on
average, the premiums homeowners pay cover the cost of claims made.
Because flood insurance is made available through the federal
government, prices are the same no matter which firm sells the policy. The cost
does vary, however, depending how close to a flood plain your home is and the
amount of coverage you need.
Here's an example from the NFIP Web site: If your home is near
the ocean, you'll pay between about $1,000 and $3,000 annually. The final tab
depends on the year in which your home was built and whether it has a basement
and the first floor is elevated.
The NFIB provides coverage of up to $250,000 on a single-family
residence and up to $100,000 on the contents, says Stevens. If you've got a
multi-million dollar home or property, you'll need to find other coverage.
Many homeowners policies protect against wind damage, including wind damages
that occur as a result of hurricanes and tornadoes. However, you might have
to purchase coverage specifically for wind or hurricane damage if you live in
certain areas of the country, says Jeanne Heisler, president of the Ronan Agency
in Brick, N.J. Folks who live on the New Jersey shore, for instance, have a
separate, higher deductible for wind damage, she says, because they're more
likely to get hit by hurricanes than those living inland.
Some Floridians and Texans also have to handle wind risk separately,
says Trey Hutt, president of Hutt Insurance Agency in Panama City, Fla. In Florida,
the state as well as private companies offers wind policies. Coverage costs
about $190 annually to insure a condominium and $925 for a house, says Hutt,
depending on value.
There is a downside to purchasing a separate policy for wind coverage.
In the event of a disaster, you can end up negotiating claims with several insurance
adjusters, each of whom may point fingers at the others. For example, the company
insuring against wind damage may say the damage to your home is a result of
flooding. The flood insurance adjuster, on the other hand, may claim the damage
was caused by the wind.
"I once saw adjusters get into a fistfight," says Hutt.
"It's extreme, but it happens."
Karen M. Kroll is a freelance writer based in
-- Posted: July 22, 2003