We would like to believe that disasters caused by floods or earthquakes are rare. But as we have seen with the recent natural disasters in the United States and abroad, the impact can be financially devastating. If you were to fall victim to a natural disaster, could you pay for the damages out-of-pocket? Would your homeowners insurance provide adequate coverage? Could any of us depend on the government for assistance?
Standard homeowners insurance generally does not cover damage directly caused by either floods or earthquakes. Federal disaster assistance is usually in the form of loans or grants and is only available if the damage is widespread and very serious, and the affected area is declared a disaster area by the Federal Emergency Management Agency. So what should you do? First, review your current insurance with your insurance professional to determine what is, and especially what isn't, covered. Assuming you are not covered for damage caused by flood or earthquake, consider buying flood or earthquake insurance, especially if you live in an area prone to recurrent disasters of this type.
Flood insurance
You might consider purchasing flood insurance even if you do not live in a high-risk area for floods. Storms, inadequate drainage, melting snow and hurricanes can all cause serious flooding. According to the National Flood Insurance Program (NFIP), approximately 20% of all flood insurance claims come from areas that are at low to moderate risk for floods (www.floodsmart.gov). And if you are buying a home in a designated flood zone, your mortgage lender will require you to carry flood insurance before granting you a mortgage.
However, you cannot simply buy flood insurance as an endorsement to your current homeowners policy. Instead, if you are eligible, you can purchase a separate flood insurance policy through an insurance company that participates in the NFIP. A few insurance companies also offer excess flood insurance policies that can supplement NFIP coverage.
A flood insurance policy provides flood protection for both your home and its contents. You can purchase up to $250,000 of coverage for the building itself, and up to $100,000 of coverage for the contents. If you own a home whose value exceeds the amount available through the federal program, you may be able to buy excess flood insurance through a private insurer. Excess flood insurance covers amounts above the $250,000 federal limit, and unlike NFIP coverage, may cover your home for its full replacement cost. You may be able to purchase these policies even in high-risk flood zones. Flood insurance offers some degree of protection for flood-related basement damage, but it does not cover all types of damage. It also does not cover events such as seepage or failure of a sump pump, and damages caused by sewer backups are not covered unless they are directly related to a flood.
Earthquake insurance
Most homeowners policies generally have very limited coverage for earthquake damage - excluding direct loss from earth movement but covering loss by a subsequent fire, explosion, breakage of glass or theft. As a result, if you live in an area prone to earthquakes, you may want to purchase earthquake insurance.
Typically, earthquake insurance covers damage to your home and your possessions. Most policies also cover costs incurred to minimize further damage after the earthquake, and costs for additional living expenses. The cost of earthquake insurance varies, depending on the scope of coverage, type of structure, and your location (e.g., in an earthquake zone). Coverage can be purchased as an endorsement to your existing homeowners insurance, or as a separate policy.
Whether you should buy earthquake insurance may depend on a number of factors, such as:
- The frequency and severity of earthquakes in your area
- The likelihood an earthquake would cause considerable damage to your home
- Whether your home is constructed to withstand an earthquake of moderate strength
- Whether you could absorb the cost of replacing your residential and personal property
If you do buy earthquake insurance, you will probably want to buy enough to cover the costs of rebuilding your home and replacing damaged personal property. That means that the amount of insurance you buy generally should be based on replacement or reconstruction costs and not the current market value of your home and possessions. Also, you may not notice some damages to your home or possessions immediately after an earthquake, so be sure the policy you buy gives you adequate time to discover damages and file a claim.
If you are deciding whether to buy flood or earthquake insurance or both, consider the following questions:
1. Do you live in a high-risk area?
2. Have you assessed the potential cost of repairs?
3. Do you have sufficient resources to repair, replace or rebuild?
4. Can you minimize potential losses by fortifying your property and securing your personal belongings?