Home insurance and the cost of flood insurance

Although the rain fell and floods came with Hurricane Irene, it was not quite on a Biblical scale, but it was certainly devastating to many communities that had never before believed it possible they could be the victims of flooding. Yet, in upstate New York and Vermont, entire communities have been introduced to a new reality of flooding and mudslides. No matter what you think about all these stories of global warming and climate change, there’s an underling reality you can’t deny. This has been a bad year for weather. Read any of the hard news sites and they will all tell you the same story. Property and auto insurance claims have already broken records this year. By the time we’re through December, the year 2011 will have gone into the books as the most expensive for weather-related insurance claims.

Perhaps not surprisingly, insurers have been receiving a lot more calls asking about flood insurance. Obviously, many homeowners have discovered their own policies exclude flood damage. In the hope of reducing future losses, they now ask what’s available and this is not good news. The majority of private insurers withdrew from covering floods some years ago. For a number of reasons, insurers have found they cannot make flood insurance profitable and they are not prepared to cross-subsidize from other types of cover. Most now only offer the Federal Flood Insurance Program which is funded out of tax revenues. As an aside, even this insurance may be lost if Washington fails to renew its funding allocation by the end of September 2011.

Assuming the Federal Program survives this budgetary crisis, it’s not really designed for the majority of homes. The first states that asked for federal help were on the Gulf Coast and the majority of properties built close to the sea don’t have basements. The cover for basements is therefore limited to the replacement of mechanical equipment like furnaces and water heaters, and the main cover only applies to the first story and above with a maximum of $250,000 for rebuilding. If you live further north, basements are common and rebuilding costs are higher. This suggests you will always need to top up the Federal Program cover. You will always need a basic home insurance policy to cover all the other ways in which your property can be damaged. The Federal Program limits contents claims to $100,000, so you will need a policy to increase the rebuilding and contents limits. The cost of this supplemental covers varies quite significantly depending on the weather patterns and geography of your state. It might surprise you to know there have been quite serious floods in Arizona, but they are quite rare. Where the risk of flooding is low, you can probably find additional cover for as little as $300 a year. In states where the risks are higher, the home insurance rates are likely to be between $600 and $800 a year. After a while, you will come to a hard decision. In states where the risk of flooding is actually quite small, how long will you pay the additional premium? According to the insurance industry, most people allow these supplemental policies to lapse within two to four years.