In the aftermath of Hurricane’s Irene and Lee, residents in states along the eastern seaboard are seeking flood insurance in droves. Inquiries and applications for the coverage are up 30 percent over a year ago. What many of these would-be customers are finding out, however, is that the policies are better tailored for residents of Florida than people living in Pennsylvania, Vermont, or New Jersey.
Farmers Insurance Group of Cos. reported its sales of federal flood insurance are up 38 percent from July to August in the northeast, while independent agents say they are seeing about 10 percent more inquiries and applications. The vast majority of these applicants are first-time customers who have never considered the need for cheap flood insurance before.
How Flood Insurance Works
Flood policies are most often issued through the National Flood Insurance Program and sold via private companies. The terms cover damage on the first, above-ground floor of the dwelling, with only limited provisions extending to basements. This is a limitation that has never proven problematic on the Gulf Coast because there, houses just don’t have basements.
In the rest of the country, and especially in the northeast, however, basements are common. The federal flood policies will only pay to replace specific items damaged in a flooded basement. This typically means water heaters, furnaces, and other types of mechanical equipment. If, however, a basement is finished, and includes furniture, flooring, and fixtures, those items are not covered.
Current Flood Insurance May Be Inadequate
At a protected level of $250,000 to rebuild a home and $100,000 on its contents, the federal flood program may not be sufficient for residents in the northeast. In fact, those residents could be looking at holding three separate policies to be completely protected against weather events like Irene and Lee. In this region, customers will need a basic home insurance policy, flood insurance, and a supplemental flood policy that covers basements and cellars at higher monetary levels.
Given the concern for maintaining cheap insurance, the news that three policies may be necessary sounds like a budget-busting proposal to homeowners in the region. In 2010, homeowners insurance premiums in the northeast averaged $800 a year. Flood insurance will add, on average, $600 to that number, with supplemental basement coverage running in the $300 to $400 range.
Flood Insurance is a Knee-Jerk Kind of Coverage
Interestingly enough, however, flood insurance is one of the “most lapsed” of all coverage options. Demand goes up after a significant event, and, according to the Wharton Center for Risk Management and Decision Processes, those policies are allowed to expire within two to four years. What is the wisest thing for residents in the northeast to do?
That’s hard to say. While this is a region that has, historically, not been prone to flooding, erratic global weather patterns over the past five years have made unusual weather almost “normal.” Residents in the northeast should take a page from the Hurricane Katrina textbook. Six years after that storm ravaged the Gulf Coast, many homeowners are still battling their insurers to get settlement money. And this occurred in a region where flood insurance is common.
At the very least, investigate a supplement or rider to your homeowners policy to cover items damaged in basement flooding. If you can arrive at a cheap insurance rate, you’ll weather the next storm with greater peace of mind and less major financial pain.