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Specialty coverage: Protecting against natural disasters

Since 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.

"It's 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.

Here's a primer on these policies.

Earthquake insurance
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.

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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 of policies.

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 structures.

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 wise trade-off.

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.

Flood insurance
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 damage.

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 every year.

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.

Wind protection
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 Minnesota.

-- Posted: July 22, 2003

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