Question: As a new homeowner, I've been approached by insurance agents hawking earthquake insurance. That seems kind of ludicrous around here, but I don't know that I want to roll the dice and watch as my home is somehow swallowed up, especially since I'll have substantial equity, more than 50 percent, in it. Thoughts?
Answer: Last month's column dealt with home owner's insurance. And while I understand the danger of dedicating the very next column to home insurance again, I felt compelled to do so. Why (besides that I actually like thinking about this stuff)? As important as homeowner's insurance is, it does not cover all potential major losses.
It does cover many of the major headaches, and most policies even cover things that might surprise — like property in your car when you are on vacation or your kid's laptop at college. But homeowner's insurance does not protect against everything.
Most notable is damage from earthquakes or floods. In fact, these two types of perils are specifically excluded in homeowner's policies. The reasons why they are excluded — part historical and part the catastrophic nature of the losses involved — is beyond this column. The important fact is they are. The good news, though, is you can insure against both earthquakes and floods.
Interestingly, very few people have or know about either type of insurance, even in higher-risk areas. You might recall a little storm called Katrina that flooded much of New Orleans. Well, most of those flooded did not have flood insurance, which meant they were sunk.
You would think after such a catastrophe that people in New Orleans, which is largely below sea level, would certainly have flood insurance. But Louisiana Insurance Commissioner Jim Donelon reported in May that only about 29 percent of people in the city had flood insurance, about the same as before Katrina.
But should you have flood or earthquake insurance? That is a question with which homeowners legitimately struggle. Ultimately the decision comes down to weighing the costs and benefits — and how much risk you can live with.
So what are the costs and where do you buy? Flood insurance is only offered by the National Flood Insurance Program (NFIP), which was created by Congress in 1968. The NFIP is administered through the Federal Emergency Management Agency, though flood insurance policies are bought through normal insurance agents. Nicely, the cost of flood insurance does not vary based upon where you buy it.
What is the cost? As with all insurance, it depends in large part on how much coverage you want and your risk level. Your risk for flood is determined by where the property is physically located. The entire nation is mapped and carved into different areas based upon the likelihood of a flood. For example, if you live on any coast or right next to a river, it is likely you are going to be considered high risk. If you live on the top of a hill, away from any natural water body, you are likely going to be considered low risk. The higher your risk category, the more you are going to pay.
NFIP reports the average flood policy costs about $600 a year — but depending on coverage and risk level, premiums can range from $129 to $5,903. You can go to NFIP's Web site (Floodsmart.gov) and get an idea of what your property-level risk and specific premium might be.
The area where I live in Danville is considered low risk and a $250,000 policy had an estimated cost of $405.
Earthquake insurance works a little differently. In most states, it is offered through private insurers. It can be purchased either as an add-on to your existing homeowner's policy — if your insurer offers the coverage — or it can be bought through a company that specializes in earthquake coverage.
Like flood insurance, the amount of coverage and where the property is located is what drives the premium. Naturally, if you live close to a known fault line — and the New Madrid fault line that borders far west Kentucky is our most famous — cost goes up. Generally, earthquake insurance is less expensive than either flood insurance or normal homeowner's insurance.
Both flood and earthquake insurance are similar to other insurances with deductibles and fine print. But both are legitimate products that cover specific perils.
Whether you choose to have either is ultimately a personal choice. And it is not an easy choice. For most people, the risk of being hit by either event is low even in high-risk areas. But both floods and earthquakes happen each year, probably more than the average person realizes, and all it takes is being hit once. In the end, you have to decide what level of risk you can tolerate and what you are willing to pay to get rid of the risk.