Informed Investor: Reviewing your homeowner's insurance: Part II

Recent earthquake and hurricane/tropical storm activity in the eastern Unied States has resulted in billions of dollars of damage to homeowners living in affected areas. This week's column discusses what federal employees should review in their homeowner's insurance policies with respect to coverage for damages to their homes caused by earthquakes and hurricanes/tropical storms.

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Recent earthquake and hurricane/tropical storm activity in the eastern part of the United States during August and early September resulted in billions of dollars of damage to homes and businesses located in these areas. Since many federal employees live in these areas --- many of whose homes may have been damaged by the earthquake and/or hurricane/tropical storm Irene -- this week’s column reviews what a typical homeowner’s insurance policy covers and does not cover with respect to damages caused by earthquakes and hurricanes.

Earthquake Damage

Earthquake protection is generally excluded from standard homeowner’s insurance policies. Those homeowners who purchase earthquake protection insurance do so either as a separate policy or as an endorsement to an existing policy.

According to Chubb Corp., an insurer of commercial property and high-end homes, most homeowners who buy earthquake coverage live in earthquake-prone states such as California and Alaska. But a homeowner who lives on the East Coast—where the first significant earthquake in 114 years occurred on Aug. 23, 2011—would not be wise to purchase earthquake insurance. This is because the extremely infrequent occurrence of earthquakes in this area of the country does not justify paying the rather expensive earthquake insurance premium.

The premium cost of earthquake insurance varies according to the location of the home. Deductibles for earthquake insurance policies vary by state and range in cost from 5 percent to 25 percent of the overall market value of the property.

Individuals who have “floaters” on their homeowner’s insurance policies in order to insure valuables such as fine art or furniture will be reimbursed for damage to these items as a result of earthquake damage. But if they want to be reimbursed for damages to their home structure as a result of an earthquake, they must purchase separate earthquake insurance. 

Wind Damage

Wind damage to a house as a result of a hurricane or a tropical storm is covered under many standard homeowner’s policies. Damage includes broken windows, torn roofs, and interior damage from water falling into a home or wind driven rain. Also covered is damage resulting from strong winds blowing tree limbs or entire trees onto a home, garage or a shed.

But many insurers have added separate “hurricane deductibles” to homeowner’s policies for homes situated close to the eastern coast of the United States. For homes that are subject to these deductibles, when a hurricane results in wind damage to the home, the damage must exceed a hefty amount—typically equal to 1 percent to 5 percent of the amount that is insured—before the insurance company will reimburse the homeowner for any type of wind damage. For a home that is insured for $500,000, that would mean a “hurricane deductible” equal to as much as 5 percent of $500,000, or $25,000.

In some states, insurance companies are permitted to reimburse homeowners for wind damage resulting from a hurricane only if a formal warning of a Category 1 or higher hurricane was given prior to the actual occurrence of the storm.

Damage to automobiles resulting from high winds, such damage from a falling tree, is covered separately under the comprehensive portion of one’s automobile insurance policy.

Flood Damage

Traditional homeowner’s insurance policies do not cover water damage resulting from floods. Floods are defined by insurers as water that rises from the ground, and can be caused by numerous events such as heavy rains, storms, melting snow, dam failures or overflowing lakes or rivers.

A homeowner can obtain flood insurance through insurance agents affiliated with the National Flood Insurance Program (NFIP), administered by the Federal Emergency Management Agency. Under NFIP, the federal government stands as an insurer of last resort for flood insurance. In exchange for this guarantee, the federal government requires participating communities to adopt and enforce land use measures that direct future development away from flood-prone areas.

Flood insurance also can be purchased from private insurers. With limited exceptions, there is a 30-day waiting period between the time an insured person applies for coverage and pays the premium before the insurance coverage takes effect.

According to the National Flood Insurance Program, the average annual flood insurance premium is $600. In some areas of the United States which have the highest probability of floods—such as along the Red River in North Dakota and along the Mississippi River—annual premiums can be as much as $6,000.

A typical residential flood policy provides coverage for “client physical loss or from flood” for the following:

Dwelling: Covers damage or loss to the building;

Personal property: Refers to the contents of a home such as furniture, appliances or clothing. Certain types of property, such as paintings may be excluded or have a dollar limit; and

Debris removal: Covers debris removal from an insured property following a flood.

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