What Does Your Homeowners Policy Cover in Disasters? Often, Not Enough

One of the major problems in the aftermath of a hurricane or wildfire is homeowners who were underinsured or did not understand the coverage their policy provided.

While cleaning up the mess at your home (assuming it is still standing) after a hurricane, tornado, wildfire or other natural disaster is always painful, there may be more agony lurking in the shadows. One of the major problems in the aftermath of a hurricane or wildfire is homeowners who were underinsured or did not understand the coverage their policy provided.

Over the last few decades, insurers have made it increasingly tough on consumers when it comes to coverage, making policies more complicated and shifting more and more risk onto consumers with exclusions, weather related deductibles and policy language that can be difficult to decipher.

As insurers have made things more difficult, homeowners need to completely understand their coverage and ask questions if they are confused. Here are a few things you should be aware of when it comes to homeowners insurance and disasters.

Flood Damage is Never Covered

One of the biggest misunderstandings when it comes to homeowners insurance relates to flood damage. A standard homeowners policy never covers flood damage. In order to be protected from flood damage you must be carrying a flood insurance policy.

Flood insurance is sold in a couple of different ways. The National Flood Insurance Program (NFIP) is the largest seller of flood insurance and the U.S Government backs all of the policies. Pricing is set by the NFIP so there is no reason to shop on price. Private insurers also sell flood insurance although it is often more expensive than NFIP policies.

Flood insurance is required if your home is located in a high-risk area and you have a federally back mortgage. However, flood damage often occurs in medium to low risk areas as well. In fact, according to data from the NFIP, more than 20 percent of all NFIP claims are from homeowners not located in high-risk flood zones. Flooding is the number one natural disaster in the U.S. and flood insurance claims average roughly $1.9 billion per year.

If you are not carrying a flood insurance policy you will be on the hook for the cost of repairing or rebuilding your home and replacing all of your ruined possessions. Theses costs can quickly spiral out of control, forcing you to use retirement funds or other assets to help cover the costs.

There are restrictions on flood insurance policies written by the NFIP. Coverage levels are capped at $250,000 and personal contents coverage is capped at $100,000. If those limits do not meet your needs it is possible to supplement your coverage with a private policy.

In addition, NFIP policies have a 30 day waiting period before coverage takes effect so don’t wait until a storm is headed your way to purchase coverage.

While flood insurance can be pricy, especially if you live waterfront, it is absolutely cheaper than repairing or rebuilding your home after a major flooding incident.

Understand Your Policy

Reading an insurance policy is never fun but it’s a necessity. Read your policy in full and ask your agent if you have questions or don’t understand part of it. Here are a few general tips when it comes to homeowners insurance to keep in mind:

• Coverage Levels: Verify that you are carrying enough coverage to easily rebuild your home if it were destroyed. Building costs can go up over time and tend to spike after a disaster so if you have not reviewed your coverage levels in years you may be underinsured.

Check local building costs (your insurance agent should be able to supply them) and multiple by the square footage of your home to make sure you can easily cover rebuilding costs. You can use our home insurance calculator to run the numbers on your dwelling coverage.

• Additions or Improvements: If you have put an addition on your home or made major upgrades review your coverage levels. In most cases you will need to up your coverage to fully insure your home.
• Know Your Coverages: In coastal states or states where hail and wind damage is common your policy may come with a separate deductible for wind or hail damage. These deductibles are usually a percentage deducible which can dramatically increase your out of pocket costs.

As an example, if you carrying $350,000 in coverage and your policy has a 5 percent wind damage deductible you will be responsible for the first $17,500 in repairs. This can come as a major shock if you were unaware of the separate deductible. These deductibles usually kick in once a storm is named.

• Inventory Your Possessions: While everyone should have an up to date inventory of their possessions, most of us don’t. A complete inventory will help make sure your claim is handled quickly and fairly. Include purchase details as well as serial numbers. There are numerous home inventory apps that help make this tedious chore easier. Store you inventory in the cloud or offsite.

Remember that high value items such as jewelry, artwork, collectibles and other expensive property is capped at around $1,500 on most policies. If you have valuables that exceed that amount you will need to purchase a rider to fully protect your expensive property.

• Replacement Value vs. Actual Cash Value: Homeowners insurance is available as replacement value or actual cash value (ACV). An ACV policy will take deprecation into account when determining the value of your possessions. This means that your 10-year-old TV will be basically worthless as far as the insurance company is concerned. While replacement value is a bit more expensive it is well worth the cost. It will replace your possessions with a brand new item of similar quality.

Helpful Article: The Best Reasons Why You Need Replacement Value