Mellody Hobson: Storm Insurance for Homes

July 8, 2005 — -- With hurricane season under way, it might be a good time to revisit your homeowners insurance policy, regardless of where you live. The biggest myth associated with homeowners insurance is that you are automatically covered in the event a catastrophe strikes your home. This, however, is more fiction that fact.

According to This Old House, there are more than 900 U.S. insurance companies that offer standard policies covering your house and its contents. Recently, Florida Gov. Jeb Bush signed into law several storm-related bills that make it easier for consumers to understand what their policies cover in the event of a hurricane. However, many homeowners remain in the dark about what type of coverage they need to protect one their biggest investments -- their home.

Is there such thing as hurricane insurance?

Yes. You can endorse your homeowners policy to include hurricane coverage. In states like Florida, a policy holder may have to pay a separate deductible (usually less than $500) for hurricane-related damage.

Is it too late to get insurance for the coming storm?

Yes. Most insurance companies will not issue new homeowners coverage once an area has been placed under a hurricane watch or warning by the National Weather Service. Additionally, the moratorium remains in effect for 48 hours after the watch/warning has lifted. The same holds true for flood insurance issued through the National Flood Insurance Program. This type of coverage has a five-day waiting period.

What if multiple hurricanes hit -- are you covered?

Yes. You are covered in the case of multiple disasters. Typically, each occurrence will trigger a new deductible. Four major hurricanes hit Florida in 2004, resulting in more than 36,000 Florida homeowners having to pay more than one deductible, according to the Florida Insurance Council.

Are you automatically covered in the case of a natural disaster?

Besides asking your agent the obvious -- how much coverage you have and how the claim process is handled -- it is important to find out what is not included in your policy. More often than not, the most likely catastrophes are not covered under a standard policy.

For example, a standard policy does not cover a homeowner in case of a flood, and flooding is the most common type of natural disaster. And do not be fooled into thinking that if you do not live near a body of water, you are not at risk. According to the Federal Emergency Management Agency, 25 percent of flood claims occur in the low-to-moderate risk areas. If you determine that you need flood insurance, you can obtain coverage from NFIP, which works with approximately 90 different insurance carriers to sell and administer policies.

Because these policies are offered by the government, prices are consistent from carrier to carrier, but they do vary depending on the proximity of your home to a flood plain as well as the amount of coverage you will need. For example, if your home is close to the ocean, flood insurance will cost between $1,000 and $3,000 annually. For more information about insurance carriers in your area, you can call 800-427-4661 or visit the FEMA Web site at www.fema.gov.

Will your insurance rates go up after a hurricane hits?

No. Homeowners rates usually do not go up after a hurricane. Rates are based on property insurance payments within a region over several years, in addition to an amount held in reserve for a hurricane or other catastrophic event. Rates usually will be increased only after a series of large catastrophic losses. Despite the record number of storms last year, the average cost for homeowners insurance in 2005 is up $17 from 2004 and is estimated at $677, according to the Insurance Information Institute.

What should you do to best prepare for future disasters?

The most important step you should take is to get home insurance coverage commensurate with your needs. The rule of thumb on deciding how much homeowners insurance you need is based on the following four questions:

The easiest way to calculate this is to multiply the total square footage of your home by the local building cost. Your insurance agent will be able to tell you approximate building costs in your neighborhood.

The typical policy covers about 50 percent to 70 percent of a typical homeowners' personal possessions. To determine if your coverage is sufficient, conduct a very thorough inventory of your home and personal items to determine the value of your goods. It is a good idea to do this with a camcorder and to make a detailed journal of all your items. Additionally, do not store the video or log in your home -- put them both in a safety deposit box.

Work with your agent to ensure that you and your family would have enough coverage for temporary living expenses (such as hotel room, meals, other expenses) which you would incur in the event you could not live in your home.

In case something happens to someone who is on your property, you are liable for their personal damages. A typical policy provides a minimum of $100,000 worth of liability. Again, this is individually driven preference, so work with your agent on coming up with an amount you believe will offer enough protection.

Do you understand the loss/recovery provisions in your policy?

It is important to select a policy that offers guaranteed replacement cost coverage and not actual cash value. For example, if your five-year-old mattress is destroyed, instead of being reimbursed for the cost of a new mattress, you would be given an amount corresponding to its depreciated value.

However, with guaranteed replacement coverage, the insurance will pay the full cost of the item at current cost. If your policy does not specifically state that you have replacement value coverage, you will only receive the cash value for your destroyed possessions.

Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.