How to Insure Against Disaster

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In the wake of Hurricane Katrina, the news that the levees had broken was followed by another devastating revelation: Most of the residents of the affected area were not adequately insured against the hurricane devastation. According to Louisiana Insurance Commissioner James Donelon, only 40% of Hurricane Katrina and Rita’s victims had flood insurance; today, that number still stands at 30% in the affected areas.

According to some experts, the rest of the country is similarly unprepared for a hurricane.

“We find that people are often uninsured or underinsured,” says Ron Reitz, president of the Quality Claims Management Corporation. “They don’t have enough coverage for their building or property.”

In many cases, this gap in insurance is a simple matter of ignorance, rather than a willful decision to forego comprehensive coverage. Flood insurance in particular is never included in a standard insurance policy; it must be purchased separately through the National Flood Insurance Program, administered by FEMA. As noted by the United Services Automobile Association, these policies have a 30-day waiting period before they take effect, so homeowners seeking coverage for the tail end of the 2010 hurricane season should purchase coverage now. Flood insurance premiums for homeowners in the highest-risk areas can run more than $1,000 a year, according to NationalFloodInsurance.com

Meanwhile, coverage for wind damage is normally included in standard homeowner’s policies, but is sometimes excluded from policies for homes in coastal areas—the very people who need it most given their exposure to hurricanes. For these high-risk homeowners, additional coverage against wind damage could run upwards of $2,000 in premiums a year.

The result is that homeowners lying in the path of a hurricane may very well lack both flood insurance and coverage against wind damage, and not even know it. This makes self-education imperative, says Reitz.

“I recommend people pull out their policies, see what their coverage is, and see who their company is,” he says. If that doesn’t settle things, a call to the agent is in order. “Contact your agent—by phone and by email—to ask what coverage you need that you don’t have.”

Finally, information must flow both ways. To ensure that you’re completely covered, Reitz suggests taking photographic inventory of all property. And be honest with your insurance company about any changes to your property, such as renovations or improvements, even if it means that your premiums go up a bit. A slight rise in premiums is well worth it if you suffer a devastating loss.

Business owners should have additional concerns when it comes to hurricane coverage. Darren Beck, president of insurance agency Business Insurance Now, frequently works with small business owners, and notes that coverage for wind damage is typically not included in their standard workplace policies. And as with homeowners, flood insurance is never included in their policies. In both cases, they must be purchased separately.

Another concern is the interruption to your business that may occur as a result of hurricane damage. “You should consider what happens when your place of business is uninhabitable,” Beck says. “Typically, businesses will get business interruption coverage,” which compensates business owners for profits lost as a result of damage to their place of business. Additional expense coverage may also be purchased to fund the cost of a relocating your business.

Things get really tricky when you run a small business out of your home—an increasingly common phenomenon as workers laid off during the recession decide to go solo, notes Beck. “A lot of people assume that homeowner’s insurance will cover their business property,” he says. “That is not true.” He adds that those who work from home must carefully document property that is used for business purposes, and insure it accordingly. And good accounting practices are crucial regardless of your place of work to ensure that you are compensated for your losses.

As with any aspect of disaster preparedness, the most important thing for homeowners and business owners is to educate themselves and prepare well in advance. That means contacting your mortgage company and insurance agent, determining your level of coverage and making sure that you’re insured well in advance of a hurricane. “When storms start heading for land, most insurance companies, including USAA, stop selling new policies or won't allow coverage increases — or both,” writes the USAA. “That's why it makes sense to prepare beforehand.”

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