Hazard, flood and earthquake insurance: Do I need them all?
- Flood and earthquake damage are not covered by a homeowners policy.
- Hazard insurance is part of a homeowners policy and required by mortgage lenders.
- Hazard insurance covers damage resulting from events such as fire, storms and theft.
- Depending on where you live, lenders may require flood or earthquake insurance.
When it comes to protecting your house, do you really need hazard, flood and earthquake insurance? After all, floods and earthquakes are hazards, aren’t they?
Hazard, flood and earthquake insurance are all different products. Whether you need one or all depends on your mortgage lender, homeowners insurance, geographic location and appetite for risk.
Homeowners and hazard insurance
If you have a mortgage, your lender will require you to buy and maintain homeowners insurance as a means to protect their investment — that is, your home. Most policies cover the home and other structures on the property, as well as the contents of the structures, such as furniture, appliances and clothing.
homeowners insurance policies usually include both hazard and liability coverage in one package. Liability insurance is used in the event that someone is injured on your property and decides to sue. Hazard coverage includes fire, storms, hail, theft or vandalism. While hazard insurance typically covers water damage from storms, it specifically does not cover damage caused by floods or earthquakes.
The catastrophic harm caused by natural disasters of this sort deter many insurance companies from providing such coverage. Flood and earthquake insurance must be purchased separately from your homeowners insurance.
Private insurance companies traditionally have been hesitant to offer flood insurance, as the high costs of flood damage made it an unsound business. In 1968, the federal government created the National Flood Insurance Program (NFIP) — managed by the Federal Emergency Management Agency — to help address this gap in the market. While there are reputable private flood insurers, coverage through the NFIP remains the most popular option for homeowners.
NFIP policies offer a maximum total coverage of $350,000, comprising $250,000 for the structure of your home and $100,000 for any personal property damaged by the flood. It typically does not cover living expenses that you might incur if you are displaced by flooding. Given that many homes are valued much higher than $350,000, some homeowners purchase supplemental flood insurance coverage through a private insurer. NFIP insurance has a 30-day wait period before activation.
If you live on a floodplain or are otherwise susceptible to flood damage, your mortgage lender may require you to buy flood insurance. Floodplains change over time, so it is important to keep an eye on how many flood-related events have occurred in your area. You do not need to live on a floodplain to purchase federal or private flood insurance.
While it is usually more expensive than the NFIP, there are some benefits to a private policy that the NFIP does not offer. For example, private policies often offer coverage beyond $350,000, will pay for transitional living expenses and can come into effect in as little as two days following purchase. Drawbacks of private insurance are that it is less stable than the NFIP. Insurance companies can change or decide not to renew the policy, rates can increase significantly over time and the policy may not be covered by a state guaranty fund in the event that the insurer goes out of business. As private flood insurance is a relatively new product, some lenders only accept NFIP coverage.
Earthquake insurance is typically not part of a standard homeowners insurance policy. While it can be a stand-alone product, many companies offer it as an add-on purchase. As with flood insurance, earthquake insurance is typically divided into coverage for the dwelling and coverage for your personal property. Oftentimes transitional living expenses are included as well. Earthquake insurance usually does not cover damage that is a secondary consequence of the earthquake, however, such as a resultant fire or tsunami.
Earthquake insurance premiums are determined by your home’s location, age, value, building materials and even the surrounding soil type. Policies also often carry high deductibles. In fact, coverage for the dwelling and personal property can be structured as two different deductibles. Read the policy carefully to understand what you will be responsible for out of pocket.
In states prone to earthquakes — particularly along the U.S. West Coast and Alaska—government often helps consumers obtain earthquake insurance. For example, the Office of the Insurance Commissioner in Washington state aggregates licensed private earthquake insurance providers that are covered by the state guaranty fund. The California Earthquake Authority is a publicly managed association of earthquake insurance providers that offer affordable coverage in the state.
While homeowners insurance is always a good idea, flood and earthquake insurance is a more individual decision. Depending on where you live, you may even want to invest in wind or hurricane insurance to boost your homeowners policy coverage. Understand your lender’s requirements, assess the location of your property and compare insurance companies to get the best deal while protecting your home.