Hurricane Irene Aftermath: 6 Tips for Flooding, Natural Disaster Insurance Policies

Aug. 31, 2011 — -- While most of the households without power because of Hurricane Irene have regained their electricity according to the Department of Energy, thousands are still cleaning up their homes after unexpected flooding. Unfortunately, many may find themselves unprepared for the costs to pay for these damages.

Damage from Hurricane Irene range from $7 to $13 billion or perhaps more, mostly from flooding and power outages. But confusion surrounding insurance policy coverage abounds.

Seventy two percent of people in a survey say they believe their insurance would pay for the full cost to rebuild from a natural disaster or fire. Yet nearly all insurance companies cap the amount they pay for a total loss unless additional coverage is purchased and most policies take depreciation into account when assessing damage, according to the last MetLife Auto & Home Insurance Literacy study in August 2010.

Here are six additional insurance facts to clarify myths related to flooding and other weather-related damage:

1. Most homeowners' policies do not include flood insurance but options exist.

Homeowners' policies usually do not cover loss due to flooding, but coverage can be purchased from the federal government. Homeowners can ask their agents about the details or contact the National Flood Insurance Program (NFIP) at 1-800-427-4661 or www.floodsmart.gov.

Over the past 10 years, the average flood claim has amounted to nearly $48,000, according to the NFIP. For building and contents for moderate-to-low risk homes, NFIP coverage starts at $129 per year.

Flood insurance can be purchased for any eligible property located in a community that participates in FEMA's National Flood Insurance Program at any time regardless of your flood risk, and coverage is available subject to exclusions and limitations in the policy. However, in most cases there is a 30-day waiting period after applying and paying the premium for a standard flood insurance policy before it becomes effective.

Chubb Group of Insurance Companies began to offer flood insurance in 2006, and its product offers possibly broader coverage than the government program. Chubb offers up to $15 million in coverage, according to Chubb spokesman David Hilgen, while NFIP offers a maximum of $250,000 for residential building coverage.

The Internal Revenue Service is also in the process of providing tax relief, including postponement of filing and payment deadlines, to victims of Hurricane Irene and will update information on the IRS website.

2. Some mortgage companies may require flood insurance when you purchase your home.

For example, if you have a federally insured mortgage and live in a high-risk flood zone, the mortgage company will require flood insurance to secure your loan, according to Chubb. Also, if you live in a high-risk flood zone and receive federal disaster assistance after a flood, you will be required to purchase and maintain flood insurance until your loan is paid off. In this case, if you don't buy flood insurance and another flood damages your property, a request for federal disaster assistance could be denied.

3. The type of "natural disaster" could be relevant. Lightning and hail: Yes. Volcanoes: no.

The MetLife study says that damage from windstorm or hail and lightning is included in most homeowners' policies, whereas damage from earthquakes and volcanic eruptions are usually not covered. Also, foundation damage from earth movement and water damage from a sewer or sump-pump are usually not covered unless you secured additional coverage.

But Judy Spry, partner in the insurance claims services practice at BDO Consulting, said for many business policies, "named wind storm" coverage and resulting flooding is usually considered the same cause of damage. Also, it may or may not be relevant that Hurricane Irene was downgraded to a tropical storm in many areas along the East Coast.

"Every insurance policy is unique, so it is best to check with your insurance agent or broker," she said.

4. How can you be sure the coverage you have will be enough to rebuild?

Homeowners insurance is usually based on the cost to rebuild rather than the current market value of a home. Yet 30 percent of homeowners incorrectly believe their insurance is based on the current market value of their home, according to the MetLife Auto & Home Insurance Literacy study from August 2010 and is conducted every two years.

Also, the majority of people surveyed expect their insurance to cover any building code mandated upgrades necessary to rebuild after a loss. But without an individual rider, or additional coverage, most home insurance does not cover these required upgrades, according to the MetLife study.

Spry said home and business owners should make sure they have coverage for replacement costs rather than actual cash value.

She said the higher premium may be worth it for the replacement cost in the long run, depending on how big your house is, how old it is and what it costs to replace it.

Business owners have other insurance options, such as service interruption coverage, and ingress and egress coverage to help employees in commuting to the business. Contingent business interruption coverage also offers help if your company is dependent on another business, such as a restaurant next to a ballpark which shuts down due to flooding.

5. Start the insurance claims process as soon as possible.

The NFIP recommends three steps once you have flooding.

First, you should also call your agent or insurance company to file a claim and an adjustor should contact you within a few days. You should know the name of your insurance company, your policy number and contact information where you can be reached.

Second, take photographs of all damaged property, including discarded objects, structural damage and standing floodwater levels and make a list of damaged or lost items, including date of purchase, value and receipts if possible.

Third, your adjuster will provide you a Proof of Loss form for your official claim for damages which you must file with your insurance company within 60 days of the flood. You should receive your claim payment after you and the insurer agree on the amount of damages and the insurer has your complete, accurate, and signed Proof of Loss form. If major catastrophic flooding occurs, it may take longer to process claims, according to the NFIP.

6. Should you hire a public adjuster on a big claim?

Spry answers no.

Public adjusters, who work for you and not the insurance company, will take a percentage of a claim even if the insured is investing a significant amount of time, such as preparing forms, for the process.

"Granted some adjusters are very knowledgable about insurance, but it's best to have coverage with an accounting firm to provide claims preparation coverage," she said. "There might be a limit on it, but it's not usually that expensive and you'll have support from an accounting perspective."

Emily Friedman contributed to this report.