What You Need To Know Before Buying Disaster Insurance
A Los Angeles County firefighter prepares to battle a hot spot on the "Creek Fire" in the Lake View Terrace area of Los Angeles on Dec. 5, 2017.Wildfires in the west, hurricanes in the southeast, the constant looming threat of the "big one" in California, floods across the midwest — it's all driving demand for so-called "disaster insurance."
These policies are usually purchased as add-ons to a standard property insurance policy and, theoretically, cover you when a disaster not covered by the base policy.
According to Vince Lefton, CEO of Bulldog Adjusters, more policies are being purchased after a lot of people felt they dodged a bullet by living just outside the paths of Hurricane Harvey and Hurricane Irma. And the prices are going up as those "100 year storms" are now coming more and more frequently.
The demand has only intensified in the months following those hurricanes, even as news reports detail how little insurance companies are actually paying out to those homeowners hit hardest by the storm.
Are they worth the extra cost?
Work + Money reached out to insurance pros and asked them when someone should consider buying disaster insurance and how to go about it. Here's what we learned:
What Is Disaster Insurance?
The insurance pros we spoke with all stressed that disaster insurance does not technically exist.
The term is a generic, and in some places it's called catastrophe insurance, and it serves as blanket term for the add-ons to homeowners' policies that cover specific incidents, like floods or earthquakes.
"There is no universal disaster insurance product. Homeowner's and comprehensive vehicle coverage are the best singular products because they cover the widest range of possibilities," said John Adama of The Prepared, which helps people understand the role and details of insurance in disasters. "Flood, earthquake, and fire insurance are great add-ons, depending on where someone lives. Buyers need to know that the devil is in the details."
What's Covered by my Base Policy?
Your base policy covers a lot and, for most people, is more than enough. The problem is you can’t predict disasters and you can't buy the disaster coverage after-the-fact.
Check your base home and property insurance policy for specifics, but the typical policy usually covers fire, lightning, wind damage, explosions, civil commotion, damage from aircraft, vandalism, theft, smoke damage, volcanic eruption and damage by vehicles.
But they don’t cover damage from the weight of ice and snow, frozen pipes, and other types of damage that may be common in your part of the country.
What Are the Odds I'll Need Disaster Insurance?
In a typical year, about 6 percent of homeowners will file disaster claims. And consider that about 44 percent of all claims against disaster policies are hurricane related, with another 30 percent coming from tornadoes and 7.5 percent from winter storms.
If you live in a place that gets hit by hurricanes, tornadoes, winter storms, or a combination of all three, you need to take a close look and see what your base policy covers.
What Types of Disasters are Covered?
The most comprehensive policies will cover "all perils except flood, earthquake, war, nuclear accident, landslide, mudslide, sinkhole and others specified in your policy." But even some of those disasters will be covered with add-ons.
While every policy is different, other types of catastrophes covered by disaster insurance can include earthquakes, fires and wild fires, floods, tsunamis, acts of terrorism, and volcanic eruptions.
Very few policies are available to cover falling objects, so that one-in-a-billion meteorite strike on your brand-new roof might leave you flat out of luck.
Know the Limitations Before you Buy
You can buy an add-on to your property insurance that will cover earthquakes, but the policies tend to be extremely limited. Likewise, the FEMA maps used to determine eligibility for flood insurance tend to be out of date, meaning a lot of people in Houston, for example, didn’t know they were living in a flood plain until after Hurricane Harvey hit in 2017.
Because of these hidden caveats, Joe Orr advises clients to make sure they know the in's and out's of their base policy before buying add-ons. Orr is an executive vice president of insurance at Clearlink, where he manages all insurance operations and sales at ClearLink Insurance Agency .
"So should you purchase these added coverages? It depends. Assess your current coverage and pay attention to coverage areas in circumstances like burst pipes or fire damage. Then make sure you’re comfortable with the deductible. Can you afford a couple thousand out of pocket?" Orr said. "You’ll also want to look at exclusions, and from there you can get a sense of alternate policies and make a more informed — and accurate — judgement."
What Are the Hidden Caveats?
Those hidden caveats that may leave you feeling burnt if disaster strikes vary from policy to policy, Adama said.
The most important thing you can do to protect yourself is carefully read the policy and ask detailed questions of your agent when something isn't clear.
"Buyers need to know that the devil is in the details," he repeated. "For example, a homeowner's policy might cover damage from an earthquake, but not damage from an earthquake caused by fracking because it's not 'natural.' Or in a hurricane, a homeowner's policy will cover damage if your roof blows off, and as a result water comes into your house. But if the water rises from the bottom up, then it's excluded as flood damage."
How Much Does Disaster Insurance Cost?
If only there were a simple answer to that question.
"You can look at the average insurance rates by state, however it differs depending on which policies homeowners decide to take and whether or not they apply exclusions to their home insurance policies," Lefton said. "For instance, homes in the Florida Keys are going to have a higher deductible or premium, depending on their policy, due to the major risk the area is for properties. Living in a floodplain or along the coast will also mean more expensive insurance rates due to the risk of living where your property is prone to wind damage, flooding, or damage from natural disasters."
And if you're going to purchase disaster insurance, this may not be the place to go bargain hunting. Aaron Singer of Bulldog Adjusters says people should make inquiries with multiple agents before making a decision.
"Don't stop at one" agent, he said. "Each insurance agent has access to different policies. Don't be afraid to put them to work. Keep in mind that the more agents you call, the more products you'll be exposed to and have access to. "
Brace Yourself for High Deductibles
If you don’t have an emergency savings fund, now is the time to set one up.
That's because the disaster add-ons are typically high-deductible policies. Many insurers will set a deductible that requires you to pay 15 percent of the total repair or replacement out of pocket.
If you don’t have that kind of cash on hand, set up a home equity line of credit for this specific purpose.
Don't Wait For The Weatherman
Most flood insurance policies — and several other types of disaster coverage — carry a 30-day waiting period after purchase before coverage kicks in. The cooling-off period is to deter homeowners from going without flood insurance most of the time and buying the policies just as heavy rains are predicted.
While some lenders will force you to buy flood insurance if you live in a flood plain area, you may not be required to carry a flood policy even if you should. You can buy relatively-affordable policies from the government through authorized insurance brokers.
Finally, keep in mind most flood policies are capped,