Under-Insuring Can Cripple a Home

July 26, 2004 -- When Hurricane Isabel swamped the Atlantic coast last September, Joan Buchanan watched helplessly as 2 feet of black ocean water flooded her home in Hampton, Va. And like many hit with weather disasters, her insurance didn't cover all the damages. Months later, she still doesn't know if her home can be repaired.

Buchanan, 47, who shares her home with her disabled mother, is among the more than 50 million Americans who live in coastal areas that are at-risk during the June-to-November Atlantic hurricane season.

And according to some insurance experts, many of those at-risk people are rolling the dice with inadequate insurance.

Though Isabel's wind speeds had slowed considerably by the time it hit land, heavy rain and rising tides flooded communities and destroyed homes along Virginia and Delaware shores. The storm caused an estimated $3.4 billion in flooding and related damages to U.S. homes and businesses.

Nine months later coastal residents are still cleaning up, some without the benefit of insurance payouts. Instead of recouping their losses to replace everything that was destroyed, Buchanan was engulfed by a swirl of governmental red tape and insurance fine print. Now, faced with the prospect of paying thousands of dollars out of their own pockets for repairs, they are wondering if they may be forced to leave their home of the last five decades.

"My mother and I have thought about moving," Buchanan said. "But it's a nice community and a nice place to live, and where would we go?"

Hurricanes cause an average of $5 billion damage every year in the United States, according to statistics kept by the National Hurricane Center, a division of the National Atmospheric and Oceanographic Association, or NOAA. And that number has been climbing as hurricanes caused above-average financial damage in seven out of the past eight years.

This year, NOAA forecast another above-normal Atlantic hurricane season, predicting 12 to 15 tropical storms and two to four major hurricanes will hit the U.S. sometime this year. If any of those elevate to the level of Isabel, many Americans could find themselves in need of financial support.

"These forecasts are pretty accurate, and it seems like we're on an upslope for frequency of storms," said NOAA spokesman Frank Lepore. "With more hurricanes out there and a huge population along the coast, there's the potential for huge financial losses."

For the unprepared, there is little recourse for these losses. Weather insurance does not reward procrastinators, and homeowners who do not look ahead can get caught short once it's time to make repairs.

"If you live in a high risk area, you've got to plan ahead. You should take an inventory of your home and ask your insurance agent if you need additional coverage," said Jeanne Salvatore, vice president of the Insurance Information Institute, a non-profit communications organization funded by the insurance industry.

Upgrading Not Easy

The choice to upgrade is not always easy. Private homeowners insurance covers only the damage created by hurricane winds, and sometimes power outages. The Buchanans' homeowners policy reimbursed them for the food that spoiled during the 10 days their electricity was out and labor costs to remove a branch that fell on their roof.

But flood damage is not covered by private insurance companies. For flood protection, consumers must book insurance through the National Flood Insurance Program. In place since 1968 and funded by the Federal Emergency Management Agency, or FEMA, the NFIP is a multi-tiered system of insuring property loss that can be confusing and expensive for comprehensive coverage.

Joan Buchanan said she and her mother Dorothy paid about $600 per year for the flood insurance. That was about $400 more than their homeowners policy. But their flood insurance only protected the structural elements of their home and appliances that were hard-wired to the house, like the furnace. A separate policy, known as content coverage, was needed to insure their possessions.

"Content coverage is very expensive, and we couldn't afford it," Buchanan said. "We lost every stick of furniture, and all of our appliances were ruined, so we had to buy a new refrigerator, stove and washer."

Recently they got word their house must also be elevated off the ground to qualify for future NFIP insurance. Coverage for that process, which Buchanan said will cost an estimated $43,000, is available under another FEMA policy that pays up to $30,000. They have petitioned through the city of Hampton for a grant from FEMA to cover the remaining $13,000 but have not yet heard a verdict.

By contrast, homeowners suffering only wind damage are covered directly under the homeowners policies. William Allen, 57, had several holes torn in his roof when Hurricane Andrew hit his three-bedroom Homestead, Fla., home in 1992.

Because the damage to his home and his water-logged furniture was caused by Andrew's winds and not flooding, the Allens were able collect $120,000 from their insurance company within a couple of months.

"We were lucky. We lived high enough on a plain that we didn't even need flood insurance," Allen said.

Many people hold dreams of living on coastal property, but the Insurance Information Institute's Salvatore said buyers must be aware of coastal weather patterns and insure their home accordingly.

"You may still want to buy the home, but you need to know the potential for weather disasters and the economic commitment that goes along with that," she said.

Reevaluate Every Year; Procrastinators Beware

Insurance providers advise home owners to reevaluate their policies every year when their yearly premium statements arrive. But as home values rose during the last decade and the damage cause by storms increased, many at-risk home owners neglected this yearly assessment, leaving them under-insured and unable to recoup losses in the event of a major disaster.

"The last couple years, with interest rates low people took out loans to make improvements to their homes. Unfortunately a lot of people don't adjust their plans to see if they need additional coverage," said Salvatore.

Major purchases such as home theater systems, stereo equipment or jewelry are also often overlooked, Salvatore said. These types of oversights potentially leave thousands of dollars of property uninsured and could be prevented if consumers anticipate the losses.

Since the Atlantic hurricane season lasts five months, property owners have a large window of time to upgrade their protection. Insurance providers regularly see an uptick in inquiries when disasters like Isabel start appearing on local weather forecasts.

But customers who try to add coverage after hurricanes begin approaching usually find themselves locked out.

FEMA mandates a 30-day waiting period before a new flood insurance policy becomes effective. And new homeowner policy sales or adjustments are typically frozen when storms are forecast.

"If there's a weather disaster on the way, you can't buy insurance. Usually there's a suspension or moratorium on writing new policies, so you've got to plan ahead," Salvatore said.

In the months following Isabel, the Buchanans got three different estimates from three different claims adjusters for the repairs to their home, ranging from $18,000 to $42,000. Believing that these estimates were inadequate, they applied directly to FEMA and received $68,000 last month.

But Buchanan said a shortage of contractors and a spike in building supplies that followed in Isabel's wake meant repairs wouldn't begin until January 2005 at the earliest. The process upended their lives and left them wondering if they should relocate.

"When you go through something like this, it's not only a financial loss, but psychological and emotional loss, too," Buchanan said. "You basically go through a death because everything you've worked for your whole life, it is taken away."