Lew Sichelman

Many  if not most  homeowners arent prepared for a flood, tornado or other natural disaster. And neither, apparently, are their insurance companies. 

Take California, where the California Earthquake Authority estimates $175 billion in residential damage would result from a recurrence of the Big One that struck San Francisco in 1906. Yet only $15 billion in damage would be covered by insurance, warns the CEA, a private nonprofit that offers earthquake coverage to Golden State residents. 

Created by the state legislature in 1996, the CEA said it is financially strong enough to cover all claims it receives, should a repeat of the super-catastrophic quake occur. 

But the magnitude 6.8 quake that hit Northridge, California, in 1994 caused so much damage that insurers paid out more in claims than they collected in premiums over the previous 30 years, bringing many dangerously close to insolvency, according to the trade journal Insurance Business America. 

What Many Policies Don’t Cover 

Louisiana-based independent adjusting service Sentry Claims President Steven Steckler said most, if not all, insurance companies have the resources to cover their insured clients losses, largely because only about 10 percent of all homeowners have earthquake coverage.  

But theres another problem: Should another major quake strike  and they have occurred in 42 states  thereno way companies could put enough boots on the ground to assess owners claims and get them the money they need to begin repairs, Steckler said. 

For one thing, there just arent enough adjusters. For another, there isnt enough infrastructure to support them. In a major quake, roads and bridges will be destroyed, so adjusters wont be able to reach people. 

At the same time, you cant just show up, said StecklerFirst, you have to have structural engineers check the integrity of the property. Until they put a tag on the door indicating a place is safe to enter, everything is at a standstill. 

Now, about the lack of coverage. Many people dont realize that a standard homeowners policy doesnt cover earthquakes  or floods, for that matter. Youll need either a rider or a separate policy to cover damage from a quake, and yet another separate policy to cover flooding. 

But quake and flood insurance are expensive, Steckler said. The deductibles on an earthquake policy are so high  anywhere from 5 to 20 percent of the coverage amount  that claims are often less than the deductible amount, especially in expensive areas like California. Consequently, homeowners end up paying the cost to repair their homes out of their own pockets. 

Worse, perhaps, some people dont even know whats covered by their policies and whats not. Even when people have coverage, 18 percent have never bothered to read their policies, a recent study by ValueInsured found. A third believe their homeowners insurance covers floods. 

The Insurance Information Institute figures upwards of 4 million houses are uninsured, and that two-thirds of all houses are underinsured, some by 60 percent. 

Most Homeowners Not Prepared 

Meanwhile, homeowners arent prepared, either. Most dont take the precautions necessary to protect their homes, like raising places in flood-prone areas or tying all joists together so houses act as one unit in quake-prone regions. 

At the height of the hurricane season, which stretches from June to November, 3 out of 4 owners in the riskiest coastal states believed they were prepared for whatever Mother Nature sent their way, according to a survey by ValueInsured, a LendingTree subsidiary. But less than half had taken any precautions. 

Hurricanes are deadly in a couple of ways: The high winds knock things over, and the tremendous amounts of rainfall and storm surge cause flooding. According to the insurance institute, flooding is the most common and costliest of all natural disasters. The National Flood Insurance Program said 90 percent of all natural disasters in the United States involve flooding. 

But flooding can happen for any number of reasons, not just big rains. Pipes sometimes burst, dams break or snow melts too rapidly. And damage from just a few inches of water can be expensive to repair. 

How to Tell if a Home is Covered 

Standard homeowners insurance is a package policy covering both damage to property and liability or legal responsibility for any injuries and property damage policyholders or their families cause to other people. This includes damage caused by household pets. 

A standard policy covers 16 disasters or perils, but neither flooding nor earthquakes are on the list. Flood coverage is available through independent agents from the National Flood Insurance Program, or through some private carriers. Earthquake coverage can be added to your standard policy as an endorsement (a.k.a. a rider) or purchased as a separate policy. 

To make sure you are covered during any kind of cataclysmic event, Steckler suggests looking for firms with a rating of A-plus or Excellent in the state where you live. These firms are the strongest financially, and do a good job investing their money, he said. 

Another consideration is whether a company is admitted or nonadmitted. The former shares in a states guarantee fund, which will cover you if the company cant meet all legitimate claims. The latter are large, standalone companies which, while there is no guarantee they will cover all claims, are often the only ones writing policies in high-risk areas. 

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com. 

Disaster Coverage is a Disaster for Most

by Lew Sichelman time to read: 4 min