Time To Review Your Homeowners and Flood Insurance Coverage

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.