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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Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care. Types of insurance Any risk that can be quantified probably has a type of insurance to protect it. Among the different

Types of insurance are:

1) Automobile insurance: Its also known as auto insurance, car insurance and in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the vehicle itself. Over most of the United States purchasing an auto insurance policy is required to legally operate a motor vehicle on public roads. Recommendations for which policy limits should be used are specified in a number of books. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to No Fault systems, which reduce or eliminate the ability to sue for compensation but provide automatic eligibility for benefits. 2) Life insurance: Life insurance provides a cash benefit to a decedent's family or other designated beneficiary, and may specifically provide for burial, funeral and other final expenses. 3) Boiler insurance: Boiler insurance is a type of property insurance that pays accidental losses to machinery and equipment. Although it is called boiler insurance it can actually cover just about any device that uses, transmits or generates mechanical or electrical power; of course certain exclusions apply. 4) Casualty insurance: Casualty insurance insures against accidents, not necessarily tied to any specific property. 5) Credit insurance: Credit insurance pays some or all of a loan back when certain things happen to the borrower such as unemployment, disability, or death. 6) Financial loss insurance: Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover failure of a creditor to pay money it owes to the insured. Fidelity bonds and surety bonds are included in this category. 7) Health insurance: Health insurance covers medical bills incurred because of sickness or accidents. 8) Liability insurance: Liability insurance covers legal claims against the insured. For example, a homeowner's insurance policy provides the insured with protection in the event of a claim brought by someone who slips and falls on the property, and brings a lawsuit for her injuries. Similarly, a doctor may purchase liability insurance to cover any legal claims against him if his negligence (carelessness) in treating a patient caused the patient injury and/or monetary harm. The protection offered by a liability insurance policy is two-fold: a legal defense in the event of a lawsuit commenced against the policyholder, plus indemnification (payment on behalf of the insured) with respect to a settlement or court verdict. 9) Total permanent disability insurance: Insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance. 10) Locked Funds Insurance: Locked Funds Insurance is a little known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorised parties. In special cases, a government may authorise its use in protecting semi-private funds which are liable to tamper. Terms of this type of insurance are usually very strict. As such it is only used in extreme cases where maximum security of funds is required. 11) Marine Insurance: It is covers the loss or damage of goods at sea. Marine insurance typically compensates the owner of merchandise for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier. 12) Nuclear incident insurance — damages resulting from an incident involving radioactivive materials is generally arranged at the national level. 13) Environmental Liability Insurance: It is protects the insured from bodily injury, property damage and cleanup costs as a result of the dispersal, release or escape of a pollutant. 14) Political risk insurance: Political risk insurance can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss. 15) Professional Indemnity Insurance: Professional Indemnity Insurance is normally a mandatory requirement for professional practitioners such as Architects, Lawyers, Doctors and Accountants to provide insurance cover against potential negligence claims. Non licensed professionals may also purchase malpractice insurance, it is commonly called Errors and Omissions Insurance and covers a service provider for claims made against them that arise out of the performance of specified professional services. For instance, a web site designer can obtain E&O insurance to cover them for certain claims made by third parties that arise out of negligent performance of web site development services. 16) Property insurance: Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance. 17) Title insurance: Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records done at the time of a real estate transaction. 18) Travel insurance: Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses, lost of personal belongings, travel delay, personal liabilities. etc. 19) Workers' compensation: Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expense incurred due to a job-related injury. 20) Terrorism insurance: Terrorism insurance is insurance purchased by property owners to cover their potential losses and liabilities that might occur due to terrorist activities. It is considered to be a difficult product for insurance companies, as the odds of terrorist attacks are very difficult to predict and the potential liability enormous. For example the September 11, 2001 attacks resulted in an estimated $31.7 billion loss. This combination of uncertainty and potentially huge losses makes the setting of premiums a difficult matter. Most insurance companies therefore exclude terrorism from coverage in Casualty and Property insurance, or else require endorsments to provide coverage. A risk manager looking for terrorism coverage is going to be facing quite a search. Some commercial insurers are offering terrorism insurance, despite the lack of a federal terrorism backstop and inaccurate techniques for modeling the risk. In general, the policies are restrictive and limited to a select few policyholders.Insurers are being very selective about who they underwrite and have only a very limited capacity to write this coverage, especially since no backstop has yet been approved in Washington. In fact, the majority of the insurance market isn't offering coverage. According to a recent study by both the Independent Insurance Agents of America (IIAA) and the Alliance of American Insurers (AAI). According to a study conducted in February of 2002 eighty percent of insurance companies have excluded or have indicated that they will exclude terrorism from commercial policies. Some of the language on the terrorism policies tends to be somewhat overly restrictive. For example, things like riot and vandalism would be covered, but if someone does it for a political cause they would not be covered. The pricing of the product, since early December, has moderated drasticly. Some of the underwriters are willing to offer more reasonable terms. The quotes that have been seen earlier were in the area of half of one percent to five percent rate online. If you're buying $10 million in limit, it was costing you somewhat in the range of $50,000 to $500,000. Recently,that range has moderated from two-tenths of one percent to 2 and half percent. The price of the policy really depends on where the clients are residing and how much limit they buy.

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