When Natural Disasters Strike: A Close Look at Disaster Insurance Coverage

Posted July 16th, 2012
by Staff Writer (no comments)

Coloradans have paid a hefty price in recent months for living amidst the scenic beauty of the Rockies. Some of its most precious features – including the trees, hillsides, and mountains of the Pike National Forest – along with almost 350 homes were razed by the Waldo Canyon Fire. Officially 100% contained on July 10, it raged for almost three weeks over 18,247 acres, forcing 32,000 residents to evacuate.

At the its worst point, 30,000 residents were under mandatory evacuation orders, during which they left behind their homes, not knowing whether or not their most valuable assets would be waiting for them once they return. Those fears were compounded by the threat of looting, which added insult to injury for residents who were temporarily uprooted. Thirty-seven homes and 28 vehicles were broken into by opportunistic thieves, who snatched thousands upon thousands of dollars of stolen possessions.

If you live in the South, where Hurricane season looms for six months each year, the Midwest, where Tornadoes can uproot a town in an instant, or out West, where wildfires can scorch hundreds of thousands of acres at a time, then you’re all too familiar with the destructiveness and mercilessness of Mother Nature. John Shelby Spong said it best: “Mother Nature is not sweet.”

At lot of things in life are unavoidable. But it’s how we prepare for those events that enables us to weather them. Enter disaster insurance coverage, the one thing that stands between us and the personal disaster that often arises from wildfires, hurricanes, floods, earthquakes, and tornadoes.

The Very Real Threat of a Natural Disaster

Each year, FEMA releases the number of major disaster declarations that have occurred in the U.S. In 2011 the agency tallied 99, 18 more than the previous year, a record. According to the Insurance Information Institute, it was the second costliest year in insured losses from natural disasters. President Robert Hartwig summarized the financial toll in a statement released by the III.

“Catastrophes striking the United States in the first nine months of 2011 caused $32.6 billion in direct insured losses, nearly double the $18.6 billion in catastrophe-caused direct insured losses insurers generally incur over the first nine months of any given year.”

The period of high activity from January to September included the barrage of tornadoes that struck the Midwest and Southeast, the most infamous of which was the EF-5 that hit Joplin, Missouri, resulting in 158 deaths.

“The $32.6 billion figure doesn’t even include the significant insured losses which arose after the pre-Halloween snowstorm, which caused enormous damage to multiple states along the Atlantic seaboard,” Hartwig said in the statement. “Coupled with other events in 2011’s fourth quarter, direct insured losses could exceed $35 billion this year.”

Twelve different climate disasters occurred in the U.S. in 2011, the most since 2008, combining for a damage total of $52 billion in insured and uninsured losses, the III reported. One of those was Hurricane Irene, a Category 1 storm that swept through the Northeast. More than 900,000 properties suffered an estimated $59 billion-worth of flood-related damages, according to UPI.

Many homes were located outside designated FEMA hazard flood zones, meaning they weren’t required to be covered with flood insurance. Among those who faced the most risk during the storm due to the surge: the 63% of homes outside the flood zone in Virginia Beach, a statistic cited in the article from CoreLogic. Of course, floods can only be covered with flood insurance, as a standard homeowners insurance policy does not cover floods and earthquakes.

Suffering major property loss caused by a natural disaster can spell the financial ruin of many uninsured Americans. Each year, countless people lose their homes and their valuable possessions, which have taken years to collect, and have no means to replace them. Because of their unpreparedness, picking up the pieces takes years.

The Necessity of Homeowners Insurance

Living though a natural disaster can be traumatic, but it’s the aftermath that determines its lasting impact. The recent upward trajectory in natural disasters and the resulting costs has forced many homeowners to come to terms with the reality that they could be next. The protection offered by homeowners insurance, a necessity for all homeowners, may cover you in the event your home is damaged by a tornado or wildfire.

Homeowners insurance encompasses the physical structure of the home and its contents. This affords you protection against the common perils, such as fire, smoke, vandalism, theft, riots or looting, and lightning strikes. If a storm blows a tree through your roof, then your insurance should ensure that it’s fixed and the items within your home that were damaged are replaced. It also covers medical payments and possible legal fees if someone on your property is injured. You can get additional coverage by upgrading to a larger policy that includes more perils.

Most lenders require borrowers to have a homeowners insurance policy to protect their investment. However, even the most generous policies exclude damage from floods and earthquakes. What’s more, some don’t provide adequate protection against hurricanes, tornadoes, and wildfires. Review your policy to familiarize yourself with the details. Many homeowners buy extra coverage to ensure all bases are covered.

Types of Individual Disaster Insurance Policies

If you’re looking to add a disaster insurance policy to your homeowners insurance coverage, then you should consider your biggest vulnerabilities. Do you live in a high-risk area for hurricanes, floods, earthquakes, tornadoes or wildfires? Even if you don’t live an area that’s traditionally considered high-risk, are you completely immune to the threat?

  • Flood Coverage: Your homeowners policy covers water damage sustained within the home, such as from a burst pipe, but it does not cover floods. Floods are defined by insurance companies as water that rises from the ground – from heavy rains or storm surge – and rapidly melting snow. Homeowners in high-risk areas are often required by their lenders to purchase flood insurance. Those policies are generally more expensive than policies in low-risk areas. You can learn more about flood insurance by visiting the National Flood Insurance Program website.
  • Hurricane Coverage: Although flooding is the most destructive outcome of hurricanes, you can purchase hurricane insurance separate from flood insurance. It’s designed to cover all the risks brought forth by hurricanes, including floods and high winds. The combination of a good homeowners and flood policy, however, will protect you against damage from water and debris.
  • Earthquake Coverage: As with flood insurance, earthquake insurance must be purchased separately from your homeowners policy. According to the III, 90% of Americans live in seismically active areas, so even if you’ve never experienced an earthquake in your life, you’re probably not insusceptible to experiencing one in the future. With an earthquake insurance policy, coverage includes the cost of repairing or replacing your damaged property, including accessory structures such as your garage, the contents of your property, and your living expenses after the disaster occurs.
  • Tornado Coverage: The Insurance Services Office reports that tornadoes and severe thunderstorms caused the highest amount of insured losses from natural disasters in the country in 2010. If your homeowners policy covers the damage from high winds and debris that accompanies powerful tornadoes, then tornado insurance may be superfluous. Again, it depends on the details of the policy.


Coverage Considerations

If you’re insured, the worst thing that can happen to you is finding out you’re underinsured – after a natural disaster strikes. A study released in 2009 by the research firm Marshall & Swift found that 64% of homes in the U.S. are “undervalued for insurance purposes” and “the average homeowner has enough insurance to rebuild only about 81% of his or her dwelling.” The remainder of the cost of damage has to be covered out-of-pocket by the owner. If your entire home has been destroyed, then rebuilding it to its previous state may not be financially feasible.

A common misconception by homeowners is that the amount of insurance they buy should reflect the real estate value of the home, when, in fact, it should cover the cost of rebuilding. Homeowners should get periodical cost estimates to ensure their policy is valued correctly so that, in the event of a disaster, their home is rebuilt entirely and all their belongings are replaced.

Additional levels of coverage beyond replacement cost are extended replacement cost and guaranteed replacement cost. The advantage of the former is that it accounts for inflation, as the insurer pays more than the replacement cost. The latter covers the entire cost of your home irrespective of price fluctuations that have occurred since the inception of the policy. You pay a higher premium, but you won’t have to get periodical cost estimates.

When taking out an insurance policy or reassessing an old one, keep these things in mind:

  • If you’ve spent several thousand dollars remodeling your home, thus increasing its overall value, you should get a cost estimate as soon as possible. It’s generally advised that homeowners do this immediately after the work is performed.
  • Account for every structure on your property, such as a garage or storage shed. These essential components to your home are often overlooked by homeowners.
  • Take a thorough inventory of all your valuable belongings by taking photos and getting them appraised. Keep your recordings somewhere secure – not inside your home – such as in a safe deposit box.
  • Do not choose an insurance company merely because it’s cheap. You’ll get what you pay for. Price matters, but you should pay close attention to consumer ratings as well.
Categories: Natural Disasters

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