With the recent hurricane activity in the Southern United States, many people are taking note of how a catastrophe can affect people’s lives and what would happen if that catastrophe hit your home. Today I wanted to take a quick moment to discuss Flood Insurance, why it is a separate insurance, whether you need it or not, how you can get it and what does it cost. It might be simpler than you think.
First off, why is Flood damage not covered under your Homeowners policy? This is a great question! After all, Homeowners Insurance is there to protect you and your home from catastrophe right? Right! However, insurance companies also need to protect themselves from catastrophes that are so large they would put an enormous financial burden on the company. Insurance companies have a duty, and legal requirement, to be financially stable so they can be there when their clients need them most. After all, what good is an insurance policy if that insurance company goes bankrupt when disaster strikes? No good at all (As a side note, there are guarantee funds set up in each state to help if your insurance company goes bankrupt. https://www.ohioga.org/ You might not get your claim paid in full but if it was a covered loss, you can still collect some money. Always make sure your insurance company has good financial rating with AM Best or another rating service).
There are certain disasters that are too large for insurance companies to absorb. Some examples are war, nuclear reaction, flood and hurricanes. Let’s look at why disasters might be too big for insurance companies to shoulder. The 25 largest Property & Casualty Insurers as of 2015 have an estimated $378.859 billion in written premium (revenue) (http://www.insurancebusinessmag.com/us/news/breaking-news/these-are-the-top-25-propertycasualty-insurance-companies-in-the-us-32630.aspx). Hurricane Harvey alone could cost over $190 billion in damages. That’s 50% of their total revenue! Insurance companies do carry insurance on themselves (reinsurance) but the financial impact would still be devastating if they covered the flood damage. Keep in mind that is not considering damages from Irma or what Jose might do. In order to cover these damages, the average Homeowners insurance premium would need to increase at least 50% and that just wouldn’t be feasible for most households. This is an oversimplification but gives you an idea as to why insurance companies don’t cover flood damages.
Now that we understand a little better why flood damage is not covered under a Homeowners policy, let’s take a look at whether you need it or not. Most people only purchase Flood policies when required to do so by a Mortgagee because the property is in the 100 year flood plain (Zone A or V). However, there are a large number of residents in the suburbs of Houston, TX that were not within the 100 year flood plain and were not required to purchase flood insurance. When the Addicks and Barker Reservoir, began to overflow the dam spillways were released and the water, coming from both ends, flooded these neighborhoods. Nature did not care that they were “not in the 100 year flood plain”. They were flooded anyways. In short, everyone has to take stock in where they live, the chances of flood and your financial situation to determine the likelihood of a flood disaster and your ability to recover from it.
If you have decided you need flood insurance, how do you get it? Flood insurance is typically sold by the National Flood Insurance Program (NFIP) which is a department of the Federal Emergency Management Agency (FEMA). However, some properties can be eligible for private flood insurance as well. The Frederick Agency sells flood insurance through one of our carriers. We offer the NFIP program and the private flood program, for those who qualify. Call or stop in for a quote!
Speaking of quotes, what does flood insurance cost? The answer, as with all insurance, is that it depends. I used a home in the city of Port Clinton, OH in Flood Zone X (not high risk flood area and outside of the 100 year flood plain). You can purchase $200,000 of building coverage and $80,000 of contents coverage with a $1,250 deductible for $467 annually. The same home with $100,000 of building coverage and $80,000 of contents coverage with the same $1,250 deductible is $385 annually. This is just an example to give you an idea of the premiums you can expect in Flood Zone X. The premiums for properties in Flood Zone A can vary from $500-$15,000 or more.
It’s important to be aware of the coverage limitations on your Homeowners insurance especially if there is coverage you can purchase by endorsement or with another policy that will close any coverage gaps. Ask questions about your coverage BEFORE the disaster hits and you are left unprepared. Contact us at the Frederick Agency today, 419-732-3171, with any of your coverage questions!
By Brennan Madison