Fires and floods, earthquakes and landslides show how unpredictable Mother Nature can be.
The recent natural disasters have made real estate investors pause and think about what protective measures they have put in place for their properties. That includes insurance, of course, but there is much more to it.
What is catastrophe insurance?
Disaster insurance or disaster insurance protects real estate from natural disasters and sometimes man-made events such as riot, terrorism or explosions.
While these disasters are rare, their damage can cost a significant amount, which is why homeowners and real estate investors should get coverage just in case.
How does natural disaster insurance work?
You may be wondering why you need catastrophe insurance when you already have home insurance. The catastrophe insurance covers what the household contents insurance does not provide. Homeowner policies only cover named hazards. If your property is damaged by a natural disaster, but your home insurance does not specifically state the type of disaster or damage, the costs will not be covered.
Often times, even an “all hazards” policy does not cover some disasters. Typically, these insurance policies skip damage due to earthquakes, mudslides, pollution, or other man-made disasters.
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What types of catastrophe insurance are there?
Catastrophe insurance varies from policy to policy and from insurance company to insurance company, so make sure you know exactly what you are looking for. Some insurance companies cover the damage caused by various natural disasters and man-made events. Other insurances are specialized, such as those that only cover floods from hurricanes or damage from tornadoes. It is not uncommon to have separate insurance for flood, volcano, or earthquake insurance.
Flood insurance is the most popular and is often required by lenders when the property is at risk of flooding. Other types of catastrophe insurance, such as earthquake coverage in California, may be required depending on the location risks. However, there are restrictions on flood and other insurance that you should be aware of.
- Know if your policy covers your property or personal effects, or both.
- Understand what types of damage are covered by the policy.
- Inquire about the initial waiting period before the start of insurance; Flood insurance usually has a waiting period of 30 days.
Think beyond insurance: other ways to protect your property
This first step is a bit obvious, but when buying a property it is important to assess the risk of possible property damage. Getting a Comprehensive Loss Insurance Exchange Report (CLUE) that shows a loss history of the home that you are looking to buy is not a bad idea. These reports will show whether previous claims will affect your insurance rate, as your insurance rates are based in part on the history of the property.
Part of your due diligence should include assessing whether a property is in a floodplain. Lenders need flood insurance when financing property in areas known to be at risk of flooding. But did you know that most of the properties flooded by Hurricane Irma were in Houston, Texas? not in floodplains and didn’t have flood insurance?
However, it’s a good idea to start with FEMA’s flood zone maps.
Flooding aside, ask yourself whether the particular geographic location in which you are shopping presents an additional risk. Is it in an area with a history of earthquakes, tornadoes, or forest fires? Even if it does, this isn’t a deal breaker as investors in earthquake-prone California are aware. However, these are risk factors that you should consider. Another suggestion is to look at the trees on the property to make sure they don’t fall.
Also take into account how the construction of the property increases or decreases weather-related risks. Is the living space increased? Are the property’s heating and cooling systems located on the ground floor or higher? Were hurricane tapes used? Are the materials fire resistant? These are the types of concerns that you should investigate.
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Home insurance and reserves
Most states do not allow landlords to insure the contents of their properties. Instead, this responsibility rests with the tenants and is often required under the terms of the rental agreement. The real estate investor is therefore responsible for household contents insurance and, if applicable, flood insurance.
If you live in a hurricane-prone area, your home insurance may cover damage caused by hurricane winds, but not damage caused by flooding. The hurricane cover usually requires a higher deductible than the deductibles for other types of damage; Earthquake insurances are also known for their high deductibles.
However, not all policies are created equal and there is no such thing as blanket insurance.
RealProtect President Lee Rogers suggests asking your insurance agent these key questions:
- What is your deductible? Is it per property or per event?
- What dangers are covered? Many policies offer broad or basic coverage. The hazards limit what types of damage are covered. You are insured by means of a special or “all risks” form, unless this is expressly excluded. Please note that floods and earthquakes are typical exceptions.
- Are you getting a payment based on replacement cost or actual cash value? If you have replacement costs, no depreciation is withheld when you pay off your loss.
- Do you have a co-insurance clause? If you are unsure of how co-insurance works in property insurance, it is important to find out.
- What coverage do you have? Is the coverage you have enough for a repair or rebuild?
- How high is your rental loss protection? Many investors also suffer a loss of income in the event of damage. Do you have adequate rental loss protection if you have a covered insurance claim? Most insurers cover up to 12 months of lost rental income while your home is being repaired or replaced.
Note that flood damage is usually excluded from household contents insurance. So does it make sense to pay for flood insurance, especially if you own the property freely and clearly and don’t need it? Not necessarily. As mentioned above, you need to assess the risk of your property and the likelihood of the event.
If you decide to buy a property despite the weather-related risks or if you own property that you now want to better protect against natural disasters, you can take measures to reduce the likelihood of damage to the property through professional maintenance as well as newer construction methods.
For example, after Hurricane Sandy swept across the east coast of the United States a few years ago, many residents rebuilt their properties using different methods. Many raised their houses several feet and turned the first floor into either a basement or a garage.
Maybe it makes sense to move equipment such as the hot water tank or the HVAC system from the basement to the first or second floor. There are also newer construction methods that can help prevent roof damage in strong winds.
Proper maintenance practices that can help prevent damage include wintering vacant properties, updating smoke alarms, and performing routine inspections.