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Recent articles by Liz Pulliam Weston: • What really matters in retirement, 8/31/2005 • Bank fees are more outrageous than ever, 8/31/2005 • How to pick a $50 credit counselor, 8/28/2005 More... |
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Related Articles Why 2 out of 3 homes are underinsured What your home insurance doesn't cover Related Resources Decision Center: Assess your needs |
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| Many flood victims aren't covered -- are you? | ||||||||||||||||||||||||||||||||||||||
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Damage done from storm surges and raging rivers isnt covered by standard home policies, and few have flood coverage. Do you need it? By Liz Pulliam Weston The true costs of the disaster won't be known for months, but one fact is already clear: Many homeowners affected by Hurricane Katrina-related flooding won't get a dime from their insurance companies. Flooding is specifically excluded from standard homeowners policies. And few people buy the supplemental insurance that's available from the government-run National Flood Insurance Program. The NFIP has written policies for 43,000 houses in Mississippi, for example, but there are four times that number of homes in just its three hard-hit coastal counties. Even in the highest-risk areas, only 1 in 4 homeowners buys flood insurance coverage. That's true even though these folks face a much higher risk of flood than they do of fire: a 26% chance over a 30-year period, according to the NFIP, compared to a 9% chance for a house fire.
There are no government bailouts. Those without flood insurance may be eligible for low-interest loans and grants, but the grants are generally limited to about $5,000. Small floods, not catastrophes Living outside a floodplain doesn't mean you're invulnerable, either. More than one-third of the flood claims paid last year went to areas considered at moderate to low risk of flooding. And most floods are fairly small-scale events. They devastate a handful of homes, or just one, never rising to the level that would trigger the declaration of a disaster area and the availability of government aid.
Ignorance of those realities, and denial, are what keep many people from buying coverage. Other issues factor in as well, such as: Coverage can be expensive. Although policies may cost as little as $112 annually in low-risk areas, premiums can easily leap over $1,000 in high-risk flood plains. The average premium is currently about $400 a year for $100,000 of coverage. That compares to an average premium of $600 for regular homeowners insurance. Related news and commentary on MSN Money
Coverage usually isn't required. Mortgage lenders insist you have homeowners' coverage, but only in the highest-risk areas do they require flood insurance. Those areas are fewer than you might think: even in New Orleans, a city that's two feet below sea level, some areas weren't considered floodplains. Meanwhile, people who own their homes free and clear don't have to buy the coverage, regardless of their risk. If you rent, you almost certainly aren't required to have a policy -- even though your landlord's coverage, if any, applies only to the building and not to your possessions. Coverage isn't always available. You can only buy flood insurance if your community participates in the NFIP and has taken steps to mitigate flood risk. That includes 20,000 communities in the U.S., but participation is far from universal. Also, you can't buy NFIP policies in certain environmentally sensitive coastal areas where the feds are trying to discourage development. Coverage is somewhat limited. The maximum coverage you can buy is $250,000 to repair or rebuild your home and $100,000 to cover the contents. But the contents coverage will pay you only the actual cash value of your possessions, not what it would cost to replace them. Basement contents typically aren't covered at all, except for systems like furnaces and water heaters that are required for the home to function. And flood insurance doesn't provide any money for living expenses, even if it takes days or weeks to restore your home. Coverage is delayed. By the time residents of Mississippi, Louisiana and Alabama knew the hurricane was coming, it was already too late to buy a policy. A 30-day waiting period prevents homeowners from buying coverage at the last minute. Some Katrina-victimized homeowners may get a break, thanks to the peculiar way insurance policies are structured. If the insurance company determines water damage was a result of the wind -- if, for example, Katrina tore the roof off or blew out the windows, letting the rain in--the claim would be paid if the homeowner had coverage for wind damage. (Most standard homeowners' policies cover such damage; in hurricane-prone coastal areas, though, people often have to buy a supplemental policy from a special risk pool to be covered.) "If there's any reason to believe that the water came in from above," said Carolyn Gorman, vice president of the Insurance Information Institute, an industry trade group, "the insurers will err on the side of the homeowner." But if the water rose from below -- whether from a levee breaking, a river rising, a storm surge from the sea -- homeowners are essentially sunk without flood coverage. But do you really need it? Does this mean you should rush out and buy coverage? Not necessarily. As I discussed in "Do you really need disaster insurance?", some homeowners can make a rational -- if risky -- decision to go bare. First, though, you should explore your options: whether you can get coverage, and how much it will cost. You may be able to get a quote from the insurer that provides your homeowners' or renters' policy. About 100 insurers write coverage for the NFIP, including major players like State Farm and Allstate. The premiums are the same regardless of where you get your coverage. If you can't get a policy from your insurer, visit FloodSmart.gov to find an agent in your area who can find out if you're eligible for coverage and how much it might cost. But do it now -- not when the next hurricane winds start blowing. Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board. | ||||||||||||||||||||||||||||||||||||||
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