Time To Review Your Homeowners and Flood Insurance Coverage
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With water still lapping at the foundations of what remains of homes in New
Orleans and the Gulf Coast, this is probably a very good time to discuss insurance
- homeowner's insurance and especially flood
insurance.
Unfortunately vast numbers of homeowners in the areas affected by Katrina carried
neither type of insurance policy - a fact that plays out in virtually
every natural disaster that comes along. Most lenders today require that borrowers
carry homeowners insurance and, where appropriate, flood insurance, yet not
all banks are vigilant about enforcing their own rules. There is nothing, other
than common sense and self preservation to force homeowners without mortgages
to insure their properties and, let's face it; economics will often trump
common sense.
Large numbers were totally uninsured when the hurricane
hit the gulf region, but probably the majority did have some type of property casualty
insurance. However, if past disasters are any indication, many, many
of those affected will soon discover they are badly underinsured.
As property values rise or the cost of building is pushed up by the rising
prices of building materials and labor rates, homeowners don't necessarily
check their policies to see if their coverage has kept pace. Banks only care
that the insurance covers the payoff of the mortgage, so they aren't keeping
track beyond that basic number. The end result? When Armageddon strikes as it
did two weeks ago, many homeowners are unable to rebuild without the help of
private charities and the Federal Government. And these resources may be in
short supply if your own private catastrophe does not warrant an official disaster
declaration or prompt vast outpourings of generosity and concern.
And, beyond the dollar amount of the policy, there is a lot that homeowner's
insurance will not cover and a great deal of confusion about the role of flood
insurance. Too many people assume that homeowners insurance is all they need
to cover any emergency.
Homeowner's policies generally cover damage or destruction
of a home from fire, wind, hail, lightning, vandalism, and theft up to the policy
amount (with some additional major caveats we will discuss later.) Virtually
no policies cover damage from earthquakes and most do not cover expensive items
such as fine art, jewelry, or electronics above a specified (and not very high
amount) without special riders listing those items covered.
Homeowner's policies rarely cover floods.
Which is not to say that they do not cover damage from water. If a water heater
bursts, if a hurricane rips holes in the roof or breaks windows allowing rain
water to pour or blow in, policies will usually pay for the damage. But if a
river overflows its banks, a storm surge drives water over a sea wall, or a
levee breaks, your homeowner's insurance company does not want to hear
about it. Rule of thumb - water coming down, OK; water coming up, NOT
OKAY.
This is where flood insurance coverage comes in. It is, obviously,
designed to pay for the repair and replacement of buildings and/or property
damaged by flood waters whether from excessive rainfall, hurricane storm surges,
mudflows, snow melt, undermining or collapse of land because of water erosion,
a dam bursting, or even an extraordinarily high tide.
Historically flood insurance has been expensive and not widely available; partially
because the people who needed it also used it, in some cases over and over again.
Insurance companies don't particularly like the insured to actually make
claims on a policy so rates rise accordingly although sometimes insurers just
refuse to renew "high risk" policies. Flood insurance was generally
unavailable or prohibitively expensive in those parts of the country prone to
flooding and with much of the nation uninsured against flooding, the Federal
Government was constantly called in to bail out, figuratively if not literally,
homeowners when flooding struck, so in 1968 Congress established The
National Flood Insurance Program. By underwriting flood insurance,
the government hoped to encourage homeowners to subsidize disaster relief with
their insurance premiums. This has worked to an extent and the Federal
Emergency Management Administration (FEMA) estimates that, for every
$1 spent in federal disaster relief, flood insurance pays an additional $3.
While hurricanes in 2004 and 2005 are bound to change the equation, flood insurance
has been self supporting in the "average" years. When additional
funds are needed in non-average years the program is permitted to borrow from
the national treasury but required to pay back the loans with interest.
Today over 20,000 U.S. communities participate in the flood insurance
program, and flood insurance is required for buying, building, or improving
structures in Special Flood Hazard Areas within these communities. However,
even those within participating communities who live in areas not prone to flooding
can obtain flood insurance - at very low cost. Such an investment is wise as
FEMA estimates that 1/3 of all claims come from homeowners who live outside
high risk areas.
High risk flood zones are determined based on the existence
of a 100 year flood plain. This does not mean that an area will flood once in
100 years. A 100 year flood plain is an area in which there is a 1
percent chance of being flooded in any given year. Premium rates are determined
by a formula using the flood plain in combination with a number of factors only
the government could possibly formulate or understand. If you are truly interested,
visit www.fema.gov.
Basic flood insurance covers only the building itself and
is limited to a maximum policy value of $250,000 for a residential building
and $500,000 for a commercial property. Contents can be insured up to $100,000
for residential properties and $500,000 for commercial but only under a contents
policy purchased separately. Within those parameters there are additional limitations.
For example, flood insurance will pay for cleanup in a basement and for repair
or replacement of systems down there that support the building such as furnaces,
circuit boxes, or washers and dryers. It will not, however, cover finishings
in basements such as wall board, floor coverings, or any personal possessions.
In another interesting wrinkle, the National Flood Insurance Program's definition
a flood is "A general and temporary condition of partial or complete
inundation of two or more acres of normally dry land area or of two or more
adjacent properties (at least one of which is yours). In other words, if your
house is washed away, you'd better pray your next door neighbor's place gets
at least a little wet.
Briefly, a third type of policy that many people seem totally unaware of is
renters insurance. This is quite inexpensive (around $100-150
per year), and covers a tenant's personal possessions. Any all-purpose insurance
agency can provide a quote and a policy.
Both home owners and flood insurance policies have many other loopholes that
the insured should be aware of but frequently is not. Next we will talk about
valued policies, deductibles, RC and ACV policies, and a few other important
details.
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