After the experience with Hurricane Katrina where thousands of homes and businesses suffered catastrophic flooding that wasn’t covered by insurance, you might expect that most people would now be adding a flood policy to their coverage.
But it is hard to tell if that is actually happening on the Mississippi Gulf Coast.
“Nationally, on average, only 20% of people who live in flood prone areas purchase flood insurance,” said Loretta L. Worters, vice president of the Insurance Information Institute. “Many people in the flood zone are still not taking the proper precautions. Of those who do purchase flood insurance, many do not purchase the correct amount of flood insurance.”
Although an estimated 98% of homeowners have insurance, studies show nearly two-thirds (64%) of all homes in America are underinsured by an average of 27%.
“That is surprising, given the fact that a home is the most valuable asset most people will ever own,” Worters said. “Insurers are working to address this problem in a variety of ways, including calculating insured value by looking at a home’s individual components rather than the traditional square-footage methods. They’re also advising policyholders to purchase inflation-guard endorsements on their policies, which automatically adjust the amount of insurance purchased each year to reflect increases in local building and reconstruction costs.”
It is difficult to tell how many home and business owners on the Coast have now purchased flood policies because large numbers of buildings were completely destroyed, and their policies have expired.
“They haven’t renewed them because they don’t have anything to insure anymore,” said Gloria Prince, a National Flood Insurance Program (NFIP) insurance specialist currently working on the Mississippi Gulf Coast. “Because we have so many policies expiring, it is hard to tell by looking at the numbers alone how much new business there has been.”
But in all the community meetings Price has been to recently, people have expressed an interest in purchasing flood insurance to have protection from the next event. “I believe there has been an increase in policy sales, but I couldn’t give you a number,” she said.
In addition to the numbers of coastal residents who didn’t have a flood policy at all, others found that they were not adequately insured. They might not have purchased enough coverage for the house, and some people failed to include any coverage for contents.
How can a home or business owner be assured they have the right amount of flood coverage?
“So many people I have talked to here have told me, ‘Yes, I bought flood insurance, but I didn’t buy nearly enough. I never thought I would lose the whole house,’” Prince said. “So they found themselves inadequately insured. You wouldn’t like to see that in future events if there was any way to prevent that.”
Prince recommends working closely with your insurance agent, the professional hired to protect your financial interest in your property.
“That is the person you should be going to for advice,” Prince said. “If you feel you are not getting good advice, find another insurance agent. You are paying them for this. They are making a commission for selling the policy. That is the fee you are paying them for advice.”
In addition to talking to an agent to make sure you have adequate contents insurance, Prince recommends getting the agent to calculate the replacement value of the home or business. It is important to get the replacement value of the home or business instead of an actual cash value settlement. The actual cash value replacement is the cost less depreciation.
One reason many people didn’t have adequate flood insurance is that mortgage companies require flood insurance, but the insurance customer might not have been aware that contents coverage had to be added separately.
The NFIP has a cap of $250,000 on a home and $500,000 on a business. There is a $100,000 cap on the contents of a home and a $500,000 cap on business contents. Many homes on the Mississippi Gulf Coast in waterfront areas are appraised higher than $250,000. Additional insurance can be purchased outside of the NFIP from private insurers.
Tenants of homes and businesses are also encouraged to purchase contents insurance.
“Lots of people don’t own the building they run their business from,” Prince said.
Some people may have decided to wait until the start of hurricane season June 1 to purchase flood insurance. That doesn’t result in much cost savings, but many people are still in a financial bind due to inadequate insurance, and slow or no insurance payments on what was covered.
People who didn’t receive damage from Katrina should still consider purchasing flood insurance.
“I sure want to encourage everyone who lives on the Gulf Coast to consider flood insurance whether they are in a special flood hazard area or not,” Prince said. “Nationally about 25% of the claims are outside of special flood hazard areas. People are thinking about hurricane season, but something that comes before hurricane season and that is spring storms. Often riverine flooding occurs before hurricane flooding. Rivers, creeks and bayous, there is such a huge potential for flooding along those, as well.”
Areas outside the flood zones have lower costs for flood insurance, with contents and the structure automatically bundled together.
There is a 30-day waiting period after purchase of a flood policy before it becomes effective. So flood insurance would need to be purchased by May 1 to be in effect when hurricane season starts June 1.
Becky Sowers, senior communications manager for Allstate, says surveys show that many people fail to make changes to their home insurance policy when they remodel or add onto a house, or its value appreciates because of the local market.
“Don’t keep the same value your home had 10 or 15 years ago,” Sowers said. “We have seen a lot of that on the Coast. People were not covered for the full value of their home. They just paid their premiums as they went along. Take a proactive role to make sure you have full coverage in case of disaster, whether fire or weather.”
It also may be necessary for stronger public-private partnerships to assure that insurance programs in the U.S. are adequate to respond to major disasters or acts of terrorism.
If the San Francisco earthquake in 1906 hit today, it would cost the insurance industry $400 billion to rebuild San Francisco. That is about what the entire insurance industry in the U.S. is valued at today. So, one major catastrophic event could wipe out the assets of the industry.
Sowers said Allstate is currently promoting a new coalition called Protecting America (www.protectingamerica.org) to work for more private-public sector partnerships to build up assets in case of large catastrophes in the future.
“Insurance only covers so much,” Sowers said. “You need more than that. Protecting America is about building a coalition to put additional layers of support in place.”
Contact MBJ contributing writer Becky Gillette at email@example.com.