Property Coverage and Disasters: What Homeowners and Business Owners Should Know

Property insurance is set up to provide coverage for most physical damage to property and losses resulting from it, in many cases. But when it comes to catastrophic coverage, the situation can change. Catastrophic events such as hurricanes, earthquakes, and floods can cause billions of dollars in damage, and hit an insurer all at once—unraveling the basic function of insurance, which is to spread risk around.

Here’s an overview—by no means an all-inclusive one—on the most expensive natural disasters, and what you can expect from coverage.

Floods. Of all the natural disasters that occur in the United States, floods are among the most expensive. Back in 1993, flooding from the Mississippi River covered nine states and resulted in more than $20 billion in losses—and this is not unprecedented. More than 10,000 people have died in floods since 1900 in this country alone.

Flood insurance is excluded from typical homeowner and commercial property insurance policies, and separate flood coverage may be mandatory depending on whether the insured building is in a flood zone. Prices are generally not expensive, but can vary depending on how hazardous your area is with regard to flood risk. The National Flood Insurance Program can mitigate costs, but people who own property in some flood-prone coastal areas are ineligible.

Earthquakes. Earthquakes are different from most other natural disasters because they are more difficult to predict—there is no “earthquake season,” as there are for hurricanes, floods, and other catastrophe. The United States experiences approximately 5,000 earthquakes each year—most of those are not devastating, but you never know which ones will be, and when a big quake strikes, the damage can be extensive—and can cause more sudden loss of life and damage to property than hurricanes, floods, and tornadoes, even if these others cause more damage in the long run.

Earthquakes are not covered under basic homeowner policies. You can buy an endorsement; the policy may or may not cover only the home and not garages and other adjacent structures. For commercial properties, the policy may or may not cover the contents of commercial structures as well as the structures themselves.

Rates for earthquake insurance vary considerably depending on a variety of factors, including the location and the construction of the insured building. These policies often have high deductibles.

Tornadoes and hurricanes. These are easier to predict, but include a variety of damage types—such as flooding, winds, and looting. Most seasons include approximately six hurricanes and nine tropical storms; about two become major events. Hurricanes in particular are among the costliest of natural disasters.

Homeowners insurance costs more in hurricane-prone areas because of the risk of damage—and deductibles are higher, too. Homeowner policies typically cover rebuilding costs—as long as your policy is up-to-date with regard to home alterations and improvements since you opened the policy, and the policy limit has kept up with local building expenses; an inflation guard clause ensures the policy is automatically updated.

Also covered include loss of use—the cost of living somewhere else while your home is repaired—and replacement cost, which is different from the home’s actual cost value. You can purchase additional coverage that will protect you from sudden increases in the cost of construction due to shortages caused by the natural disaster. Building code updates and belonging replacement costs are usually covered under a separate endorsement.

Large-scale natural catastrophes can have a devastating effect on communities, cities, states, and individual lives—as well as insurers. Many areas are prone to at least one kind of natural disaster, so be aware of the specific dangers in your area—and be sure you purchase the insurance you need to cover the damage should the worst happen.

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