Does the Insurance Industry Require Special Coverage for Hurricanes?

Estimated loss is a major component of how insurance rates for U.S. homeowners are calculated. Along with estimating losses from relatively common causes, insurers also calculate the likelihood of perils inherent to particular geographic areas. The Pacific coast is prone to earthquakes and mudslides; in the Midwest, tornadoes are a hazard. In Florida, the most catastrophic damage comes from hurricanes.

Hurricanes hold an assortment of destructive forces: sustained wind that can range from 74 to more than 150 mph, torrential rain, coastal wave surge, flooding and peripheral tornadic action. There is no special comprehensive coverage for hurricane damage. Instead, insurance companies offer policies that cover various components separately.

Flood insurance is the only component mandated by law, not by the state or the insurance industry, but by the federal government. The National Flood Insurance Act of 1968 and the Federal Disaster Act of 1973 specify that homeowners in the highest-risk flood zones must carry flood insurance if they have a federally-backed mortgage. Residents of communities that participate in the National Flood Insurance Program (NFIP) can obtain insurance through the NFIP that covers damage to buildings and contents, whether the property is owned or rented. Coverage is available from private insurers for property owners in non-participating communities.

While homeowners’ insurance generally covers some natural hazards, in areas of high risk it usually excludes items like water damage and wind damage. If so, then interior damage caused by leaks from broken plumbing, or having a ceiling collapse after a neighbor’s tree lands on the roof would not be covered. Separate coverage is needed for such events.

The amount of coverage required is set by the mortgage lenders. The sum of the mortgage is somewhat irrelevant; lenders typically require enough insurance to cover either the actual cash value or the full replacement cost of the dwelling. Actual cash value allows depreciation for the age and condition of the property –a damage claim to replace a 15-year-old roof would pay less than if the roof were newly-shingled. Full replacement cost is based on the estimated price of total reconstruction with new materials, and includes an amount for demolition and disposal of debris if the structure is deemed damaged beyond repair. Actual cash value gradually decreases because of depreciation. Full replacement cost gradually increases due to inflation or improvements.

Most insurance companies will not issue a homeowner’s policy unless it covers at least 80 percent of the replacement cost. Homeowners in high risk areas should review their coverage carefully. The worst time to discover policy exclusions is after a hurricane hits.

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