Flooding is the most common and costly natural disaster in the United States, causing an average of $50 billion in economic losses each year. Most U.S. natural disasters declared by the President involve flooding.

There is no coverage for flooding in st andard homeowners or renters policies or in most commercial property insurance policies. Coverage is available in a separate policy from the National Flood Insurance Program and from a few private insurers. Despite efforts to publicize this, many people exposed to the risk of floods still fail to purchase flood insurance.

The widespread flooding associated with Hurricane Katrina in 2005, the Mississippi floods of 2011 and Hurricane Irene and superstorm S andy in 2012 set in motion a debate about how to improve the federal program.

RECENT DEVELOPMENTS

• National Flood Insurance Reform: In March 2014 Congress rescinded many of the rate increases called for by The Biggert-Waters Flood Insurance Reform Act, passed two years earlier. The original act sought to make the federal flood insurance program more financially self-sufficient by eliminating rate subsidies – discounts that many property owners in high-risk areas receive.
• According to the New Orleans Times-Picayune, the 2014 law prevents any policyholder from seeing an annual rate increase exceeding 18 percent. It calls on the flood program’s administrator, the Federal Emergency Management Agency, to “strive” to prevent coverage from costing more than 1 percent of the amount covered. In other words, if the policy offered $100,000 of coverage, the premium would not exceed $1,000.
• The law also reinstates a practice known as gr andfathering, meaning that properties re-categorized as being at a higher risk of flooding under FEMA’s revised maps would not be subject to large increases.
• It also ends a provision in Biggert-Waters that removed a subsidy once a home was sold. People who purchased homes after Biggert-Waters became law will receive a refund. Many lawmakers in coastal states were concerned that the higher cost of flood insurance would have a negative impact on the real estate industry.
• The subsidy will now be covered by a $25 surcharge on homeowners flood policies and a $250 surcharge on insurance for non-residential properties and secondary (vacation) homes.
• According to data from FEMA, most current flood insurance policyholders (81 percent, or 4.5 million) pay rates based on the true risk of flood damage and so were not affected by Biggert-Waters or the subsequent rollback. Properties most affected by the rate hikes were in high-risk flood zones; were built before communities adopted their first Flood Insurance Rate Map; or were second homes; or are second homes that have not been elevated. Others affected include businesses and those who live in homes that have been repeatedly flooded.
• In June 2014 Florida enacted a law that encourages private companies to offer flood insurance. The legislation permits four types of flood coverage – a st andard policy, which resembles National Flood Insurance Program coverage, and three enhanced policies. To encourage market growth, the law allows insurers to file their own rates until October 1, 2019. After that, rates will be subject to regulatory approval.
• Policies in Force: While the number of flood policies in force is growing, a significant portion of the population at risk of flooding still is not insured for flood damage, as the flooding in the Midwest in the spring of 2008 and from superstorm S andy in 2012 revealed. The latest available data show that in 2013, there were nearly 5.6 million policies in force, compared with 5.0 million in 2005, the year of hurricanes Katrina and Rita. Premiums grew to $3.5.billion in 2013, from $2.2 billion in 2005. In 2013, 16,854 claims were paid, compared with 148,448 claims in 2012 and 213,290 in 2005. The cost of claims was $441 million in 2013, compared with $8.8 billion in 2012 and $17.8 billion in 2005.
• Flood Re in the U.K.: In June 2013 the British government adopted a new approach to flood insurance, ending a longst anding voluntary agreement with the Association of British Insurers to supply flood insurance through the private market. The private market will continue to write flood insurance, but premiums will be capped. The highest-risk policies will be reinsured by Flood Re, an industry-run, not-for-profit organization. All U.K. household insurers will pay an assessment to fund excess Flood Re losses.

BACKGROUND

The National Flood Insurance Program: Before Congress passed the National Flood Insurance Act in, the national response to flood disasters had been to build dams, levees and other structures to hold back flood waters, a policy that may have encouraged building in flood zones.

The National Flood Insurance Act created the National Flood Insurance Program (NFIP), which was designed to stem the rising cost of taxpayer funded relief for flood victims and the increasing amount of damage caused by floods. The NFIP has three components: to provide flood insurance, floodplain management and flood hazard mapping. Federal flood insurance is only available where local governments have adopted adequate floodplain management regulations for their floodplain areas as set out by NFIP. More than 20,000 communities across the country participate in the program. NFIP coverage is also available outside of the high-hazard areas.

The law was amended in 1969 to provide coverage for mudslides and again in 1973. Until then, the purchase of flood insurance had been voluntary, with only about one million policies in force. The 1973 amendment put constraints on the use of federal funds in high-risk floodplains, a measure that was expected to lead to almost universal flood coverage in these zones. The law prohibits lenders that are federally regulated, supervised or insured by federal agencies from lending money on a property in a floodplain zone when a community is participating in the NFIP, unless the property is covered by flood insurance. The requirement for flood insurance also applies to buildings that receive financial assistance from federal agencies such as the Veterans Administration. However, because the initial mortgage on the property is frequently sold by the originating bank to another entity, enforcement of this law has been poor.

Legislation was enacted in 1994 to tighten enforcement of flood insurance requirements. Regulators can now fine banks with a pattern of failure to enforce the law, and lenders can purchase flood insurance on behalf of homeowners who fail to buy it themselves, then bill them for coverage. The law includes a provision that denies federal disaster aid to people who have been flooded twice and have failed to purchase insurance after the first flood.

Buildings constructed in a floodplain after a community has met regulations must conform to elevation requirements. When repair, reconstruction or improvement to an older building equals or exceeds 50 percent of its market value, the structure must be updated to conform to current building codes. A 2007 NFIP study on the benefits of elevating buildings showed that due to significantly lower premiums, homeowners can usually recover the higher construction costs in less than five years for homes built in a “velocity” zone, where the structure is likely to be subject to wave damage, and in five to 15 years in a st andard flood zone. The Federal Emergency Management Agency (FEMA) estimates that buildings constructed to NFIP st andards suffer about 80 percent less damage annually that those not built in compliance.

How It Works: The NFIP is administered by FEMA, now part of the Department of Homel and Security. Flood insurance was initially only available through insurance agents who dealt directly with the federal program. The “direct” policy program has been supplemented since 1983 with a private/public cooperative arrangement, known as “Write Your Own,” through which a pool of insurance companies issue policies and adjust flood claims on behalf of the federal government under their own names, charging the same premium as the direct program. Participating insurers receive an expense allowance for policies written and claims processed. The federal government retains responsibility for underwriting losses. Today, most policies are issued through the Write-Your-Own program but some non-federally backed coverage is available from the private market.

The NFIP is expected to be self-supporting in an average loss year, as reflected in past experience. In an extraordinary year, as Hurricane Katrina demonstrated, losses can greatly exceed premiums, leaving the NFIP with a huge debt to the U.S. Treasury that it is unlikely to be able to pay back. Hurricane Katrina losses and the percentage of flood damage that was uninsured led to calls for a revamping of the entire flood program.

Flood adjusters must be trained and certified to work on NFIP claims. NFIP general adjusters typically reexamine a sample of flood settlements. Insurers that fail to meet NFIP requirements must correct problems; otherwise they can be dropped from the program.

As with other types of insurance, rates for flood insurance are based on the degree of risk. FEMA assesses flood risk for all the participating communities, resulting in the publication of thous ands of individual flood rate maps. High-risk areas are known as Special Flood Hazard Areas or SFHAs.

Flood plain maps are redrawn periodically, removing some properties previously designated as high hazard and adding new ones. New technology enables flood mitigation programs to more accurately pinpoint areas vulnerable to flooding. As development in and around flood plains increases, run off patterns can change, causing flooding in areas that were formerly not considered high risk and vice versa.

People tend to underestimate the risk of flooding. The highest-risk areas (Zone A) have an annual flood risk of 1 percent and a 26 percent chance of flooding over the lifetime of a 30-year mortgage, compared with a 9 percent risk of fire over the same period. In addition, people who live in areas adjacent to high-risk zones may still be exposed to floods on occasion. Ninety percent of all natural disasters in this country involve flooding, the NFIP says. Since the inception of the federal program, some 25 to 30 percent of all paid losses were for damage in areas not officially designated at the time of loss as special flood hazard areas. NFIP coverage is available outside high-risk zones at a lower premium.

Flood insurance covers direct physical losses by flood and losses resulting from flood-related erosion caused by heavy or prolonged rain, coastal storm surge, snow melt, blocked storm drainage systems, levee dam failure or other similar causes. To be considered a flood, waters must cover at least two acres or affect two properties. Homes are covered for up to $250,000 on a replacement cost basis and the contents for up to $100,000 on an actual cash value basis. Replacement cost coverage pays to rebuild the structure as it was before the damage. Actual cash value is replacement cost minus the depreciation in value that occurs over time. (Excess flood insurance is available in all risk zones from some private insurers for NFIP policyholders who want additional coverage or where the homeowner’s community does not participate in the NFIP.) Coverage for the contents of basements is limited. Coverage limits for commercial property are $500,000 for the structure and another $500,000 for its contents.

To prevent people from putting off the purchase of coverage until waters are rising and flooding is inevitable, policyholders must wait 30 days before their policy takes effect. In 1993, 7,800 policies purchased at the last minute resulted in $48 million in claims against only $625,000 in premiums.

Proposals for Change: In a final report published in 2006 by the American Institutes for Research (AIR), which conducted an evaluation of the federal flood insurance program, AIR said that although much had been accomplished, the program fell short of meeting its goals in part because the NFIP did not have the ability to guide development away from floodplains and cannot restore beneficial floodplain functions once they have been impaired. In addition, AIR said, many people still are not covered or not adequately covered for flood damage. AIR also noted that the NFIP was hampered in reaching its goals by insufficient Congressional funding, lack of pertinent data, misperceptions about the nature of the program and the breakdown in coordination among its three major sectors.

A report published by FEMA in 2007 suggests that development patterns should be changed to protect environmentally sensitive areas and that communities in the flood program should be encouraged or required to ban development in these locations.

Another criticism of the NFIP is that it does not charge enough for coverage. Among the reasons for the premium shortfall is that the cost of coverage on some dwellings is subsidized- those that were built before floodplain management regulations were established in their communities. As a result, the premiums paid for flood coverage by the owners of these properties reflect only 30 to 40 percent of the true risk of loss.

Over time. lawmakers considering legislation to renew authorization of NFIP have proposed many changes that would have increased the NFIP’s future income, including making owners of property subject to repetitive flooding pay premiums that more closely reflect the true cost of their losses and gradually eliminating the flood insurance subsidy for vacation and second homes. In addition, they would have allowed higher premium increases to make the program eventually self-sustaining.

Flood Coverage in Other Countries: There are two basic methods of providing flood insurance in developed countries. Under the first, the optional system, insurers extend their st andard policy to include supplemental coverage for flood damage on payment of additional premium. The coverage tends to be expensive due to the fact that only those most likely to be flooded, and therefore to file claims, purchase it, a situation known in the insurance industry as adverse selection. Among the countries with optional coverage are Germany and Italy. The other method is “bundling.” Under this system, flood coverage is combined with coverage for other perils such as fire and windstorm, thus spreading the risk of flood losses across a large geographical area and greatly increasing the percentage of the population covered for flood damage. Countries that have adopted this method include the United Kingdom, Spain and Japan. In addition, in some countries such as France and Spain there are government compensation programs for major disasters, including flooding, that take effect when the cost of a disaster reaches a certain level. The system in the United States is unique in that the government underwrites the coverage and private insurers act as administrators bearing no actual flood risk.

KEY SOURCES OF ADDITIONAL INFORMATION

The National Flood Insurance Program Community Status Book

Source: Insurance Information Institute, “Flood Insurance” http://www.iii.org website. Accessed June 27, 2014. http://www.iii.org/issue-update/flood-insurance

© Copyright 2014. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Floods are one of the most common hazards in the United States, however not all floods are alike. Some floods develop slowly, while others such as flash floods, can develop in just a few minutes and without visible signs of rain. Additionally, floods can be local, impacting a neighborhood or community, or very large, affecting entire river basins and multiple states.

Flash floods can occur within a few minutes or hours of excessive rainfall, a dam or levee failure, or a sudden release of water held by an ice jam. Flash floods often have a dangerous wall of roaring water carrying rocks, mud and other debris. Overl and flooding, the most common type of flooding event typically occurs when waterways such as rivers or streams overflow their banks as a result of rainwater or a possible levee breach and cause flooding in surrounding areas. It can also occur when rainfall or snowmelt exceeds the capacity of underground pipes, or the capacity of streets and drains designed to carry flood water away from urban areas.

Be aware of flood hazards no matter where you live or work, but especially if you are in low-lying areas, near water, behind a levee or downstream from a dam. Even very small streams, gullies, creeks, culverts, dry streambeds or low-lying ground that appear harmless in dry weather can flood.

Before a Flood

What would you do if your property were flooded? Are you prepared?

Even if you feel you live in a community with a low risk of flooding, remember that anywhere it rains, it can flood.  Just because you haven’t experienced a flood in the past, doesn’t mean you won’t in the future.  Flood risk isn’t just based on history; it’s also based on a number of factors including rainfall , topography, flood-control measures, river-flow and tidal-surge data, and changes due to new construction and development.

Flood-hazard maps have been created to show the flood risk for your community, which helps determine the type offlood insurance coverage you will need since st andard homeowners insurance doesn’t cover flooding.  The lower the degree of risk, the lower the flood insurance premium.

In addition to having flood insurance, knowing following flood hazard terms will help you recognize and prepare for a flood.

To prepare for a flood, you should:

• Build an emergency kit  and make a family communications plan.
• Avoid building in a floodplain unless you elevate and reinforce your home.
• Elevate the furnace, water heater and electric panel in your home if you live in an area that has a high flood risk.
• Consider installing “check valves” to prevent flood water from backing up into the drains of your home.
• If feasible, construct barriers to stop floodwater from entering the building and seal walls in basements with waterproofing compounds.

During a Flood

If a flood is likely in your area, you should:

• Listen to the radio or television for information.
• Be aware that flash flooding can occur. If there is any possibility of a flash flood, move immediately to higher ground. Do not wait for instructions to move.
• Be aware of stream, drainage channels, canyons and other areas known to flood suddenly. Flash floods can occur in these areas with or without typical warnings such as rain clouds or heavy rain.

If you must prepare to evacuate, you should do the following:

• Secure your home. If you have time, bring in outdoor furniture. Move essential items to an upper floor.
• Turn off utilities at the main switches or valves if instructed to do so. Disconnect electrical appliances. Do not touch electrical equipment if you are wet or st anding in water.

If you have to leave your home, remember these evacuation tips:

• Do not walk through moving water. Six inches of moving water can make you fall. If you have to walk in water, walk where the water is not moving. Use a stick to check the firmness of the ground in front of you.
• Do not drive into flooded areas. If floodwaters rise around your car, ab andon the car and move to higher ground, when water is not moivng or not more than a few inches deep. You and the vehicle can be swept away quickly.  If your vehicle is trapped in rapidly moving water, stay in the vehicle. If the water is rising inside the vehicle, seek refuge on the roof.
• Do not camp or park your vehicle along streams, rivers or creeks, particularly during threatening conditions.

After the Flood

Your home has been flooded. Although floodwaters may be down in some areas, many dangers still exist. Here are some things to remember in the days ahead:

• Use local alerts and warning systems to get information and expert informed advice as soon as available.
• Avoid moving water.
• Stay away from damaged areas unless your assistance has been specifically requested by police, fire, or relief organization.
• Emergency workers will be assisting people in flooded areas. You can help them by staying off the roads and out of the way.
• Play it safe. Additional flooding or flash floods can occur. Listen for local warnings and information. If your car stalls in rapidly rising waters, get out immediately and climb to higher ground.
• Return home only when authorities indicate it is safe.
• Roads may still be closed because they have been damaged or are covered by water. Barricades have been placed for your protection. If you come upon a barricade or a flooded road, go another way.
• If you must walk or drive in areas that have been flooded.
  • Stay on firm ground. Moving water only 6 inches deep can sweep you off your feet. St anding water may be electrically charged from underground or downed power lines.
  • Flooding may have caused familiar places to change. Floodwaters often erode roads and walkways. Flood debris may hide animals and broken bottles, and it’s also slippery. Avoid walking or driving through it.
• Be aware of areas where floodwaters have receded. Roads may have weakened and could collapse under the weight of a car.
• Stay out of any building if it is surrounded by floodwaters.
• Use extreme caution when entering buildings; there may be hidden damage, particularly in foundations.

STAYING HEALTHY

A flood can cause physical hazards and emotional stress. You need to look after yourself and your family as you focus on cleanup and repair.

• Avoid floodwaters; water may be contaminated by oil, gasoline or raw sewage.
• Service damaged septic tanks, cesspools, pits and leaching systems as soon as possible. Damaged sewer systems are serious health hazards.
• Listen for news reports to learn whether the community’s water supply is safe to drink
• Clean and disinfect everything that got wet. Mud left from floodwaters can contain sewage and chemicals.
• Rest often and eat well.
• Keep a manageable schedule. Make a list and do jobs one at a time.
• Discuss your concerns with others and seek help. Contact Red Cross for information on emotional support available in your area.

CLEANING UP AND REPAIRING YOUR HOME

• Turn off the electricity at the main breaker or fuse box, even if the power is off in your community. That way, you can decide when your home is dry enough to turn it back on.
• Get a copy of the book Repairing Your Flooded Home (737KB PDF) which is available free from the American Red Cross or your state or local emergency manager. It will tell you:
  • How to enter your home safely.
  • How to protect your home and belongings from further damage.
  • How to record damage to support insurance claims and requests for assistance.
  • How to check for gas or water leaks and how to have service restored.
  • How to clean up appliances, furniture, floors and other belongs.

• The Red Cross can provide you with a cleanup kit: mop, broom, bucket, and cleaning supplies.
• Contact your insurance agent to discuss claims.
• Listen to your radio for information on assistance that may be provided by the state or federal government or other organizations.
• If you hire cleanup or repair contractors, check references and be sure they are qualified to do the job. Be wary of people who drive through neighborhoods offering help in cleaning up or repairing your home.

Source: FEMA, “Floods,” http://www.ready.gov website. Accessed June 27, 2014. http://www.ready.gov/floods

© Copyright 2014. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

• In the past 5 years, all 50 states have experienced floods or flash floods.
• Everyone lives in a flood zone. (For more information, visit our Flood Zones FAQs.)
• Most homeowners insurance does not cover flood damage.
• If you live in a Special Flood Hazard Area (SFHA) or high-risk area and have a Federally backed mortgage, your mortgage lender requires you to have flood insurance. (To find your flood risk, fill out the Flood Risk Profile.)
• Just a few inches of water from a flood can cause tens of thous ands of dollars in damage.
• Flash floods often bring walls of water 10 to 20 feet high.
• A car can easily be carried away by just two feet of floodwater.
• Hurricanes, winter storms and snowmelt are common (but often overlooked) causes of flooding.
• New l and development can increase flood risk, especially if the construction changes natural runoff paths.
• Federal disaster assistance is usually a loan that must be paid back with interest. For a $50,000 loan at 4% interest, your monthly payment would be around $240 a month ($2,880 a year) for 30 years. Compare that to a $100,000 flood insurance premium, which is about $400 a year ($33 a month).
• Homes and businesses may qualify for the low-cost Preferred Risk Policy, with premiums starting as low as $129 for a home and its contents and $643 for a commercial building and its contents.**$129 residential annual premium provides $20,000 building and $8,000 contents coverage. $643 commercial annual premium provides $50,000 building and $50,000 contents coverage.
• You are eligible to purchase flood insurance as long as your community participates in the National Flood Insurance Program. Check the Community Status Book to see if your community is already an NFIP partner.
• In most cases, it takes 30 days after purchase for a policy to take effect, so it’s important to buy insurance before the storm approaches and the floodwaters start to rise.
• In a high-risk area, your home is more likely to be damaged by flood than by fire.
• Even though flood insurance isn’t federally required, anyone can be financially vulnerable to floods. In fact, people outside of mapped high-risk flood areas file nearly 25% of all National Flood Insurance Program flood insurance claims and receive one-third of Federal Disaster Assistance for flooding.
• From 2003 to 2012, total flood insurance claims averaged nearly $4 billion per year.
• When your community participates in the Community Rating System (CRS), you can qualify for an insurance premium discount of up to 45% if you live in a high-risk area and up to 10% in moderate- to low-risk areas.
• Since 1978, the NFIP has paid more than $48.1 billion for flood insurance claims and related costs (as of 7/8/13).
• More than 5.5 million people currently hold flood insurance policies in more than 21,800 communities across the U.S.
• The two most common reimbursement methods for flood claims are: Replacement Cost Value (RCV) and Actual Cash Value (ACV). The RCV is the cost to replace damaged property. It is reimbursable to owners of single-family, primary residences insured to at least 80% of the building’s replacement cost.

For more policy and claim statistics, visit the National Flood Insurance Program.

Source: National Flood Insurance Program, “Resources: Flood Facts,” https://www.floodsmart.gov website. Accessed June 27, 2014. https://www.floodsmart.gov/floodsmart/pages/flood_facts.jsp

© Copyright 2014. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

A st andard homeowners insurance policy includes four essential types of coverage. They include:

• Coverage for the structure of your home.
• Coverage for your personal belongings.
• Liability protection.
• Additional living expenses in the event you are temporarily unable to live in your home because of a fire or other insured disaster.

1. THE STRUCTURE OF YOUR HOUSE

This part of your policy pays to repair or rebuild your home if it is damaged or destroyed by fire, hurricane, hail, lightning or other disaster listed in your policy. It will not pay for damage caused by a flood, earthquake or routine wear and tear. When purchasing coverage for the structure of your home, it is important to buy enough to rebuild your home.

Most st andard policies also cover structures that are detached from your home such as a garage, tool shed or gazebo. Generally, these structures are covered for about 10% of the amount of insurance you have on the structure of your home. If you need more coverage, talk to your insurance agent about purchasing more insurance.

2. YOUR PERSONAL BELONGINGS

Your furniture, clothes, sports equipment and other personal items are covered if they are stolen or destroyed by fire, hurricane or other insured disaster. Most companies provide coverage for 50% to 70% of the amount of insurance you have on the structure of your home. So if you have $100,000 worth of insurance on the structure of your home, you would have between $50,000 to $70,000 worth of coverage for your belongings. The best way to determine if this is enough coverage is to conduct a home inventory.

This part of your policy includes off-premises coverage. This means that your belongings are covered anywhere in the world, unless you have decided against off-premises coverage. Some companies limit the amount to 10% of the amount of insurance you have for your possessions. You have up to $500 of coverage for unauthorized use of your credit cards.

Expensive items like jewelry, furs and silverware are covered, but there are usually dollar limits if they are stolen. Generally, you are covered for between $1,000 to $2,000 for all of your jewelry and furs. To insure these items to their full value, purchase a special personal property endorsement or floater and insure the item for it’s appraised value. Coverage includes “accidental disappearance,” meaning coverage if you simply lose that item. And there is no deductible.

Trees, plants and shrubs are also covered under st andard homeowners insurance. Generally you are covered for 5% of the insurance on the house—up to about $500 per item. Perils covered are theft, fire, lightning, explosion, v andalism, riot and even falling aircraft. They are not covered for damage by wind or disease.

3. LIABILITY PROTECTION

Liability covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by your pets. So, if your son, daughter or dog accidentally ruins your neighbor’s expensive rug, you are covered. However, if they destroy your rug, you are not covered.

The liability portion of your policy pays for both the cost of defending you in court and any court awards—up to the limit of your policy. You are also covered not just in your home, but anywhere in the world.

Liability limits generally start at about $100,000. However, experts recommend that you purchase at least $300,000 worth of protection. Some people feel more comfortable with even more coverage. You can purchase an umbrella or excess liability policy which provides broader coverage, including claims against you for libel and sl ander, as well as higher liability limits. Generally, umbrella policies cost between $200 to $350 for $1 million of additional liability protection.

Your policy also provides no-fault medical coverage. In the event a friend or neighbor is injured in your home, he or she can simply submit medical bills to your insurance company. This way, expenses are paid without a liability claim being filed against you. You can generally get $1,000 to $5,000 worth of this coverage. It does not, however, pay the medical bills for your family or your pet.

4. ADDITIONAL LIVING EXPENSES

This pays the additional costs of living away from home if you cannot live there due to damage from a fire, storm or other insured disaster. It covers hotel bills, restaurant meals and other expenses, over and above your customary living expenses, incurred while your home is being rebuilt.

Keep in mind that the ALE coverage in your homeowners policy has limits, usually a percentage of the amount of coverage you have on your home, and some policies include a time limitation. But the amount of ALE coverage is separate from the amount available to rebuild or repair your home. For example, suppose you have a policy that provides up to $150,000 in rebuilding costs and up to $15,000 (10 percent) for ALE and you use up the entire $15,000, your insurance company will still pay what it costs to rebuild your home up to the policy limit of $150,000.

Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20 percent of the insurance on your house. You can increase this coverage, however, for an additional premium. Some companies sell a policy that provides an unlimited amount of loss-of-use coverage, but for a limited amount of time.

If you rent out part of your house, ALE coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.

Source: Insurance Information Institute, “What Is Covered by a St andard Homeowners Policy?” iihs.org website. Accessed June 2, 2014. http://www.iii.org/articles/what-coverage-is-included-in-a-st andard-homeowners-insurance-policy.html

© Copyright 2014. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

You need enough insurance to cover the following:

• The structure of your home.
• Your personal possessions.
• The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs.
• Your liability to others.

The structure

You need enough insurance to cover the cost of rebuilding your home at current construction costs. Don’t include the cost of the l and. And don’t base your rebuilding costs on the price you paid for your home. The cost of rebuilding could be more or less than the price you paid or could sell it for today.

Some banks require you to buy homeowners insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure it’s enough to cover the cost of rebuilding. (If your mortgage is paid off, don’t cancel your homeowners policy. Homeowners insurance protects your investment in your home.)

For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local building costs per square foot. To find out construction costs in your community, call your local real estate agent, builders association or insurance agent.

Factors that will determine the cost of rebuilding your home:

• Local construction costs
• The square footage of the structure
• The type of exterior wall construction–frame, masonry (brick or stone) or veneer
• The style of the house (ranch, colonial)
• The number of bathrooms and other rooms
• The type of roof and materials used
• Other structures on the premises such as garages, sheds
• Fireplaces, exterior trim and other special features like arched windows
• Whether the house, or parts of it like the kitchen, was custom built
• Improvement to your home–adding a second bathroom, enlarging the kitchen or other additions that have added value to your home

St andard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance.

Flood insurance is available from the National Flood Insurance Program – NFIP and from some private insurers. Earthquake coverage is available from private insurance companies or, in California, also through theCalifornia Earthquake Authority.

Replacement cost policies
Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation–the decrease in value due to age, wear and tear, and other factors.

If you purchase a flood insurance policy, coverage for the structure is available on a replacement cost basis.

Guaranteed or extended replacement cost coverage
After a major hurricane or a tornado, building materials and construction workers are often in great dem and. This can push rebuilding costs above homeowners policy limits, leaving you without enough money to cover the bill. To protect against such a situation, you can buy a policy that pays more than the policy limits.

An extended replacement cost policy will pay an extra 20 percent or more above the limits, depending on the insurance company. A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster.

Building codes
Building codes are updated periodically and may have changed significantly since your home was built. If your home is badly damaged, you may be required to rebuild your home to meet new building codes. Generally, homeowners insurance policies (even a guaranteed replacement cost policy) won’t pay for the extra expense of rebuilding to code. Many insurance companies offer an Ordinance or Law endorsement that pays a specified amount toward these costs. (An endorsement is a form attached to an insurance policy that changes what the policy covers.)

Inflation guard
Consider adding an inflation guard clause to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area.

Older homes
If you own an older home, you may not be able to buy a replacement cost policy. Instead, you may have to buy a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes, like plaster walls and wooden floors, with similar materials, the policy will pay for repairs using the st andard building materials and construction techniques in use today.

Insurance companies differ greatly in how they insure older homes. Some won’t insure older homes for the replacement cost because of the expense of re-creating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for the replacement cost as long as the dwelling is in good condition.

If you can’t insure your home for the replacement cost or choose not to do so–in some cases, the cost of replacing a large old home is so high that you might not want to replace it with a house of the same size–make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.

Your personal possessions

Most homeowners insurance policies provide coverage for your personal possessions for approximately 50 percent to 70 percent of the amount of insurance you have on the structure or “dwelling” of your home. The limits of the policy typically appear on the Declarations Page under Section I, Coverages, A. Dwelling.

To determine if this is enough coverage, you need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire (for more information see How do I take a home inventory and why). If you think you need more coverage, contact your agent or insurance company representative and ask for higher limits for your personal possessions.

Replacement Cost or Actual Cash Value
You can either insure your belongings for their actual cash value, which pays to replace your home or possessions minus a deduction for depreciation up to the limit of your policy. Or you can opt for replacement cost, which pays the actual cost of replacing your home or possessions (no deduction for depreciation) up to the limit of your policy.

Suppose, for example, a fire destroys a 10-year-old TV set in your living room. If you have a replacement cost policy for the contents of your home, the insurance company will pay to replace the TV set with a new one. If you have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies also replace the item and deliver it to you.

Generally, the price of replacement cost coverage is about 10 percent more than that of actual cash value. If you need a flood insurance policy for your belongings, it is only available on an actual cash value basis.

Insuring expensive items with floaters/endorsements
There may be limits on how much coverage you get for expensive items such as jewelry, silverware and furs. Generally, there is a limit on jewelry for $1,000 to $2,000. You should ask your agent or look it up in your policy. This information is in Section I, Personal Property, Special Limits of Liability. Insurance companies may also place a limit on what they will pay for computers.

If the limits are too low, consider buying a special personal property floater or an endorsement. These allow you to insure these items individually or as a collection. With floaters and endorsements, there is no deductible. You are charged a premium based on what the item (or collection) is, its dollar value and where you live.

You can determine the value by providing your agent with a recent receipt or getting the item or collection appraised.

Additional living expenses after a disaster

This is a very important feature of a st andard homeowners insurance policy. This pays the additional costs of temporarily living away from your home if you can’t live in it due to a fire, severe storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt.

Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20% of the insurance on your house. Some companies will even sell you a policy that provides you with an unlimited amount of loss of use coverage, for a limited amount of time.

If you rent out part of your house, this coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.

You should talk to your agent or company to make sure you know exactly how much coverage you have and how long the coverage will be in effect. In most cases, you can increase this coverage for an additional premium.

Liability to others

This part of your policy covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by pets. It pays for both the cost of defending you in court and for any damages a court rules you must pay.

Generally, most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. Increasingly, it is recommended that homeowners consider purchasing at least $300,000 to $500,000 worth of coverage of liability protection.

Umbrella or Excess Liability.
You should buy enough liability insurance to protect your assets. If you own property and or have investments and savings that are worth more than the liability limits in your policy, you may consider purchasing an excess liability or umbrella policy.

Umbrella or excess liability policies provide extra coverage. They start to pay after you have used up the liability insurance in your underlying home (or auto) policy. An umbrella policy is not part of your homeowners policy. You have to purchase it separately. In addition to providing a higher dollar amount, they offer broader coverage. You are covered for libel, sl ander, and invasion of privacy. These things are not covered under st andard homeowners or auto policies.

The cost of an umbrella policy depends on how much underlying insurance you have and the kind of risk you represent. The greater the underlying liability coverage, the cheaper the policy. This is becaue you would be the less likely to need the additional insurance. Most companies will require a minimum of $300,000 on your home and your car, if you own one.

Source: Insurance Information Institute, “How much homeowners insurance do I need?” iihs.org website. Accessed June 2, 2014. http://www.iii.org/individuals/homei/hbs/howmuch/

© Copyright 2014. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Dear Valued Customer,

In this issue of “———————-” we focus on Homeowner’s Insurance.

How much homeowners insurance do you need? What things do you need to consider when you’re buying homeowner’s insurance? What types of disasters does your insurance cover? Would you be covered in the event of an earthquake, a flood, or other natural disaster? If you’re installing a pool, what type of insurance you need. And, if you’re renting the home you live in, you still have to use insurance to protect your possessions. Read all this and much more.

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