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Disaster and Insurance

While many of us don't like the idea of paying our insurance premiums each year, we're always glad we did when we need to file a claim.  But how many of us even think about buying insurance against disasters?  We might even be lulled into complacency because we're thinking that our existing homeowners policy insures us against natural disasters.  But as we'll soon explain, that's not necessarily the case.
In this article we're going to explain what coverage you can expect from a "standard" homeowners insurance policy.  We're also going to talk about events that might not be covered under an existing policy that can lead to devastating losses.  With those two pieces of information, you can then make an educated decision as to whether or not you need to purchase disaster insurance.

Homeowners Insurance Coverage

The specific protection you're buying in a homeowners insurance policy that we're going to discuss in this publication has to do with property coverage.  We're going to talk about the protections available for damage to the home, or dwelling.  A homeowners insurance policy offers other protections too, such as liability insurance, but that particular topic is covered elsewhere on this website.
An insurance policy that offers the homeowner adequate protection will pay the costs required to rebuild the entire structure, as well as the replacement of much of the home's content.  But while your insurance company pledges to pay these costs, there is a limit to their generosity.  This limit is often stated in terms of the "perils insured against."
And while the exact coverage will vary from policy-to-policy, the following list should give you a good idea of the types of natural "disasters" that a standard policy covers:
  • Fire / Lightning
  • Windstorms / Hail
  • Freezing of Plumbing / Pipes
  • Damage from Weight of Ice
  • Volcanic Eruptions (with exceptions)
On the other hand, your policy will also spell-out the disasters you're not insured against.  The most common exclusions to a policy include water damage, as well as damage caused by earth movement.

Disasters Not Typically Covered

If we examine the typical natural disasters that can strike home, our list is relatively short and includes:
  • Earthquakes - while certainly more common in states like California, earthquakes can happen (albeit with low probabilities) nearly everywhere on earth.
  • Floods - typically the result of abnormal rainfall, flooding can be the result of localized storms or hurricanes.  As is the case with earthquakes, floods resulting from hurricanes are more common in the Gulf Coast states and North Carolina.
  • Windstorms - again, a windstorm can range from a localized burst of wind to more organized storms such as tornados.  Windstorms and tornados occur with a greater frequency in a stretch of the United States known as Tornado Alley which stretches through the states of Texas, Oklahoma, Kansas, Nebraska and South Dakota.
  • Volcanic Eruptions - the least common of disasters, volcanic eruptions encompasses lahar (wet rock flow),  lava flows, and pyroclastic flows (a high-speed flow of hot, dry, gas and rocks).
  • Landslides - typically the result of rainfall, volcanic eruptions, avalanches, earthquakes or other events triggering large land movements.
  • Fire - in the context of naturally occurring disasters, the typical even might be a forest fire / wildfire resulting from lightning strikes.

Insurance Exclusions

In the same way that insurance companies are up-front about identifying the perils insured against, policies are also very clear on what's not covered - the exclusions.  Again, depending on your geography, as well as you insurance carrier, the two most common exclusions are:
  • Earth Movement
  • Flooding
So the good news is that you're very likely insured against many natural disasters already just by owning a homeowners insurance policy.  The bad news is that if you're in a flood prone area or live in an area of the country where earthquakes are relatively common, then you're going to have to purchase insurance against these disasters.

Disaster Insurance Policies

Before making any purchase decision, we suggest you take the time to open up your homeowners insurance policy and read through your existing coverage.  The exact coverage should be clearly spelled-out in your policy's buyer's guide or in the policy itself.  Only then will you have a clear picture of the types of disasters that are already covered by your policy.
As promised, we're going to finish up this article by explaining some of the options you have when it comes to purchasing disaster insurance.

Flood Insurance

Flooding can occur in nearly all 50 states.  In fact according to the Federal Emergency Management Agency (FEMA) around 30% of all flood claims originate from areas that are categorized as moderate-to-low flood risk.
Fortunately, flood insurance is universally available to homeowners via FEMA's National Flood Insurance Program (NFIP).  A home located in a moderate-to-low risk area can purchase $250,000 in coverage for just over $300 annually.  This same level of coverage in a high-risk area will cost in the neighborhood of $2,500.

Earthquake Insurance

In most states, earthquake insurance can be purchased directly from your homeowners insurance policy company.  The California Earthquake Authority (CEA) is a state-run insurance pool that is responsible for most of the policies sold in California.
The cost of earthquake insurance will vary by geography, the value of the home, the dwelling type (year built), as well as the number of stories (multilevel versus single story).  The factor having the biggest influence on cost, however, is the location of the home.  For example, a $1 million policy for new, single-story home will cost around $450 in the San Diego area, while that same policy for an identical home located in Oakland will cost closer to $2,300.
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