Homeowners picking up the pieces from Hurricane Michael will quickly learn an important lesson: not all hurricane-related damage is covered by home insurance.
Before making landfall Wednesday, Michael rapidly intensified to an extremely strong storm packing 155 mile-per-hour winds, just shy of Category 5 status. The storm ranked as the third-most intense hurricane to hit the continental United States, according to Accuweather, and was the strongest storm to ever hit the Florida Panhandle.
Towns and cities along the Panhandle coast were left in ruins, and damage extended well inland into southern Georgia. The storm’s high winds stripped roofs and caused trees to fall on homes and cars. Coastal communities were walloped by a massive storm surge, which forecasters predicted could reach as high as nine to 13 feet before the storm.
For homeowners, what precisely caused the damage to their home will prove important for insurance purposes, because coverage will depend on how the damage was caused. During a hurricane, if high winds cause roof damage that leads to significant water accumulation within the house, insurance will likely cover it. But if a nearby river crests because of the heavy rainfall and then causes flooding, the damage to homes will only be covered if the owners have flood insurance.
That’s why most homeowners in the path of September’s Hurricane Florence’s torrential rains would have been better off if their home had been hit by a wildfire or volcanic eruption — at least from an insurance perspective.
Damage caused by flooding isn’t covered by standard home insurance policies. Only homeowners who bought separate flood insurance for their homes were covered if water from Florence damaged their house. And there weren’t many people in that boat.
Florence caused between $20 billion and $30 billion in losses to both commercial and residential properties across the Southeast due to flood and wind damages, according to estimates from property data firm CoreLogic CLGX, +1.31%
Most homeowners affected by Florence will be stuck footing the bill: CoreLogic also estimated that 85% of the losses to residential properties were uninsured. Before the storm hit, actuarial firm Milliman estimated that fewer than 10% of households in North Carolina had flood insurance.
A similar refrain could now play out because of Hurricane Michael. When Hurricane Irma struck Florida last year, only 14% of the 3.3 million households in the nine counties affected by the disaster had flood insurance coverage, according to data from Pew Charitable Trusts. That’s in spite of the fact that Florida households comprise 35% of policies under the National Flood Insurance Program.
Even when insurance does cover the damage from a certain catastrophe, deductibles are still at play. Hurricane deductibles vary from policy to policy, but are often assessed as a percentage of the home’s overall value.
Coverage for other disasters operates similarly. In volcanic eruptions, damage caused by lava flows or resulting fires is covered by a standard homeowner’s policy, but if the eruption causes seismic activity, homeowners will not be reimbursed unless they have purchased a separate earthquake policy.
Buying additional insurance policies for disasters like floods and earthquakes might seem like a no-brainer, but it’s an expensive proposition. “They have to do a cost benefit analysis,” said Michael Crowe, co-founder and CEO of Clearsurance, a site where consumers can review and compare insurance companies.
The average annual premium for a policy through the National Flood Insurance Program was $878 as of April 2017. But flood insurance premiums can easily cost thousands of dollars in regions that are determined to be at the highest risk of flooding.
But flooding is just one type of natural disaster that isn’t covered by standard home insurance policies. And in the case of disasters like hurricanes, where damage can be caused by a variety of factors including wind, rain and storm surge, it can quickly get confusing—and frustrating— for homeowners who are trying to figure out whether their insurance policy covers certain damage.
Here is what homeowners need to know about insurance and natural disasters:
What is covered under a standard homeowner’s insurance policy
Some natural disasters are always covered by homeowner’s insurance, including wildfires, tornadoes and hail storms. But other natural disasters are never or rarely covered under a standard homeowner’s insurance policy. They generally fall into two categories: floods and “earth movements.”
The first category comprises disasters caused by rising water, which includes everything from floods caused by extensive rainfall and hurricane-induced storm surges to dam failures and tsunamis. “Earth movements” include disasters such as earthquakes, landslides and sinkholes.
Unfortunately, many Americans are unaware that these disasters are not covered by a standard homeowner’s policy, according to the Insurance Information Institute.
Certain natural disaster typically aren’t covered because of the level of the destruction they create, said Lynne McChristian, a spokeswoman for the Insurance Information Institute and executive director of the Center for Risk Management Education and Research at Florida State University.
With these disasters, “the damage is usually so widespread, and it’s typically a total loss,” McChristian said. “Insurance companies can’t price it appropriately to make it a viable line of business for them.”
The government provides flood insurance
In the case of insurance for flooding, the federal government has stepped in. The National Flood Insurance Program was created in 1968 after insurance companies struggled to pay off claims following a slew of floods in the 1950s. Homeowners have the option to buy flood insurance through this program or to get a private insurance policy. In certain cases, homeowners may be required to purchase flood insurance by their mortgage lender if their home is located within a flood zone.
Private flood insurance now accounts for roughly 15% of all flood premiums nationwide, according to a March report from Insurance Journal. And for many homeowners, a policy from a private insurer rather than through the federal insurance program could be cheaper. A July 2017 briefing from Milliman found that private flood policies would have lower premiums for 77% of all single-family homes in Florida, 69% in Louisiana and 92% in Texas.
Earthquakes
Similarly, homeowners will need to purchase a separate policy or a rider to their standard home insurance policy from a private insurer to be covered for an earthquake. California residents also have the option to purchase coverage through the California Earthquake Authority. That said, if an earthquake causes a house fire, some damage might be covered by the standard policy alone.
Sinkholes
As for sinkholes, coverage options vary from state to state. A standard home insurance policy may cover minor damage caused by a sinkhole — but catastrophic damage (generally defined as damage to more than half of the structure) is excluded. People can either get sinkhole insurance in the form of a standalone policy or an endorsement to the standard insurance policy, depending on where they live.
Tennessee and Florida require insurers to offer optional sinkhole coverage. Insurers in Florida are also required to provide insurance for “catastrophic ground cover collapse” through their standard policies.
Did the homeowner take care of the property?
The property’s upkeep can also play a role in whether or not damage caused by a storm or other natural disaster is covered. For instance, if winter storms cause an ice dam to form on the roof of the home and the owner is not proactive about removing it, the insurer may choose to deny coverage for water damage.
You have some options if you skip insurance
If homeowners don’t buy specialized insurance coverage and then get hit by some sort of disaster, they do have some options to offset their losses. They can get a grant from the Federal Emergency Management Agency or a loan from the Small Business Administration.
“Those are not designed to bring you back to a pre-disaster condition — they’re designed just to get you back on your feet,” McChristian said. “Insurance is designed to get you back to where you were before the disaster occurred.”
How to decide whether you need coverage
Earthquakes have caused damaged in all 50 states at some point since 1900, according to the Insurance Information Institute.
For starters, homeowners need to consider whether or not they are at risk. They should check government flood zone maps. They are generally available from county governments, or you can search by address on the FEMA website. But they aren’t foolproof because they are only periodically updated.
Other factors to consider include the property’s elevation (if it’s at or just a few feet above sea level it’s more prone to flooding) and whether there has been a lot of construction in the area. This could displace vegetation that would soak up rainfall and prevent flooding.
As for earthquakes, homeowners shouldn’t assume they’re not at risk just because they don’t live on the West Coast. Earthquakes have caused damaged in all 50 states at some point since 1900, according to the Insurance Information Institute (a trade group that of course has a vested interest in people getting insurance). And fracking for oil and natural gas has led to seismic activity in parts of the country that had never before experienced it.
How to get to the front of the line when you need help
Regardless of whether or not a homeowner has insurance coverage for a specific natural disaster, getting their property assessed is critical in beginning the rebuilding process.
Following a natural disaster, a consumer’s first step should be to contact their insurance agent or company immediately. That is critical because insurance claims are handled on a triage basis, McChristian said.
“Those with the most damage get to the front of the line because those people have the most need for recovery assistance,” McChristian said.
By clarifying how to file a claim and conveying the state of their property, homeowners can improve the chances of having their case handled more quickly by their insurer. Homeowners should also learn the ins and outs of how to file their claim, including what information is needed and how long they have to file. Now is also the time to determine what their policy’s deductible is.
Make a head-start on assessing damage
The insurance company will send its own adjuster free of charge to inspect the property and assess the total cost of the damage. Homeowners can take steps to prepare for this by documenting what was damaged or destroyed by the natural disaster, getting bids from contractors and keeping track of receipts for any expenses they incur following the storm. Homeowners shouldn’t hesitate to make temporary repairs to protect their property from further damage.
Homeowners shouldn’t hesitate to make temporary repairs to protect their property from further damage.
A pricier option: Hire a third-party insurance adjuster to assess their property. Given the backlog insurers will experience following widespread disasters, it can take a while to receive a payout. To expedite this process, a homeowner can choose to hire an independent or public adjuster to assess their property.
Studies have shown that hiring public adjusters leads to higher insurance settlements. But these professionals don’t come cheap — they generally charge a fee that’s anywhere from 10% to 20% of the insurance settlement. And it’s critical to hire a reputable professional. (Check the websites of the National Association of Independent Insurance Adjusters and the National Association of Public Insurance Adjusters.)
Always have someone look at damaged property
And even if homeowners aren’t covered for flood insurance, they should still have their insurance company assess their property and whatever damage occurred.
Crowe has experienced this firsthand. In 2006, an extended period of rainfall in Newburyport, Mass., where Crowe and his family lived, caused their newly remodeled basement to flood. However, their insurance policy did not include flood coverage. He thought he would have to pay for all the damage.
But when insurance adjusters inspected the property, they noted that the basement’s sump pump — designed to prevent water accumulation — had failed.
In other words, he got lucky. The insurance company categorized the damage as the result of a mechanical failure rather than a flood, so the company covered the damage.
“I thought to myself, ‘I’m really fortunate to have insider knowledge,’” Crowe said.