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Last year’s natural disasters, including hurricanes in the South and Southeast and flooding in the Northeast, point out the need to be prepared when an emergency strikes. Evacuation plans, emergency supplies, and alternate living arrangements are all extremely important, but many people neglect one of the most important parts of their disaster recovery plan by failing to keep their property and casualty (P&C) insurance updated.

P&C insurance includes auto, renter, homeowner, watercraft, aircraft, and high-value item insurance. It is designed to protect property owners against catastrophic loss — such as that caused by accident, fire, flood, or earthquake — that a property owner can’t afford to pay out of pocket. Unfortunately, because of soaring home values and lack of knowledge, many property owners have failed to review their coverage and would be unpleasantly surprised should a disaster strike. Take a look at some of the most common coverages and potential problem areas.

Renter’s insurance

Many uniformed servicemembers rent properties during their careers. These may either be short-term rentals for a temporary duty assignment or while awaiting permanent quarters or a long-term lease. What many renters don’t realize is that their personal belongings are not protected from loss caused by fire, flood, or earthquake by the landlord or the government. Unfortunately, some learn this only after they have suffered a partial or total loss of their property.

Renters insurance provides protection for personal property — often at full replacement cost — in the case of fire, flood, or other natural disaster. In addition, some policies provide moving and storage protection and the ability to purchase personal liability insurance. Premiums on renters insurance usually are reasonable, and this type of insurance is highly recommended by financial experts. Renters in California must purchase earthquake insurance through the California Earthquake Authority (CEA).

Homeowner’s insurance

If you own a home, homeowners insurance is a must. Lenders require it to make a mortgage loan, and it protects you from the loss of the home and personal property against most perils (fire, tornado, etcetera). However, there are two important exceptions: flood and earthquake. Special coverage is needed to protect against these incidents (see below).

With home values soaring in many areas of the country, you should regularly review your homeowners insurance to ensure the coverage is adequate. Most policies have built-in “inflation adjustors” that automatically increase the coverage level each year, but if the property has increased 40 percent in the previous three years and the automatic inflation adjustment is only 10 percent for the same time period, you could be significantly underinsured.

The key components of homeowners insurance include:

Dwelling: This protects the actual home. Most insurance experts recommend “actual replacement cost,” “guaranteed replacement cost,” or “full replacement cost” language within the policy. This can be particularly important for owners of older or historic homes, for which the true replacement cost could be considerably higher than the current market value of the home. If the policy is for “actual cash value,” then the cost to fully replace the home might not be covered. Certain carriers require a separate full replacement cost rider for historic homes. Failure to cover your home at full replacement value can be a nasty shock in the case of a major loss.

Loss of use: If your home is rendered unlivable by an event, this provides payment for temporary housing. With some insurance carriers, this is part of the base policies; with others, it needs to be purchased separately.

Personal property: This includes household furnishings, clothing, and home electronics. Most policies will cover 40 percent to 60 percent of the covered dwelling value. However, most valuable items — such as jewelry, furs, computer equipment, collectibles, art, and silverware — have fairly low limits (usually $500 to $1,500) depending on the insurance company. If you have more valuable personal property that falls into the restricted categories, consider expanded protection through a personal articles endorsement that expands coverage on high-ticket items. Many policies also will have some allowance or deductible for depreciation on personal property, so full replacement value is not guaranteed.

Personal liability: This protects you from claims if someone is injured on your property of if someone covered under your policy accidentally causes an injury to someone else or damages someone else’s property. The current standard for many homeowner policies is $300,000 an incident, but in today’s environment of $1-million-plus lawsuits, this standard might not be enough. Many financial experts recommend liability coverage equal to two times your net worth, so you might need to explore an umbrella liability policy (see below).

In addition to the basic homeowners coverage, you also should consider one or more of the following endorsements and riders, based on personal circumstances:

Personal property replacement cost coverage: This covers most of your personal property at full replacement cost, without a deduction for depreciation.

Home business: If you have a home-based business or maintain a home office, this provides coverage for your business equipment and inventory (in most states).

Additional residence: This provides additional liability coverage for residential rental properties you own but don’t live in.

Personal property/articles: This provides additional coverage for high-ticket items such as jewelry, silverware, collectibles, and other valuables.

Water/sewer backup: This covers non-flood related water damage caused by sewer backup or sump pump failure.

Umbrella liability policy: This isn’t a regular homeowners policy endorsement, but rather a separate liability policy that provides excess liability coverage for both auto and homeowners insurance. Most insurance carriers require you to carry both policies with them before they will issue an umbrella policy, but it provides relatively inexpensive additional liability coverage with a $1 million policy costing about $200 to $300 annually.

Specialty property insurance

In addition to basic homeowners insurance and associated endorsements, there are two specialty insurance coverages that can help protect your property against disasters, floods, and earthquakes.

Flood insurance: Believe it or not, everyone in the United States lives in a potential flood zone, and flood damage is not covered by traditional homeowners insurance. Flooding can be caused by tropical storms, hurricanes, melting snows, heavy rainfalls and, as we saw in New Orleans, La., failed protective devices such as levees. Flood protection requires a separate flood policy and is available through the National Flood Insurance Program (NFIP) for the 20,000 communities that participate in this Federal Emergency Management Association (FEMA) sponsored program.

Those living in high-risk areas, designated “special flood hazard areas” (SFHAs), are required to purchase flood insurance to secure financing to buy, build, or improve a property. Coverage limits available through the NFIP program are $250,000 for the dwelling and $100,000 for contents. If the cost to rebuild the home will exceed these limits, then a separate excess flood insurance policy from a company that specializes in such coverage is necessary.

However, FEMA estimates that 25 percent of all flood losses occur in low-to-moderate risk areas and encourages anyone in a participating community to consider flood insurance to enhance financial peace-of-mind. Residents of low-to-moderate risk areas can get a preferred risk policy with lower rates than the standard SFHA policy. The coverage limits remain the same — $250,000 and $100,000 for the home and contents, respectively.

It is important to note there is a 30-day waiting period before flood insurance becomes active. This prevents the system from being overwhelmed if a large hurricane is bearing down but also makes it incumbent upon the homeowner to do some advanced planning.

Earthquake insurance: Homeowners living in earthquake zones are strongly recommended to obtain earthquake insurance, because most standard policies do not cover this hazard. However, such coverage can be added to a standard policy as an additional endorsement. Earthquake insurance carries a separate deductible, which ranges from 2 percent to 10 percent of the dwelling’s value. For example, a $500,000 home with a 5-percent deductible endorsement would require the homeowner to cover the first $25,000 in costs.

*CALIFORNIA RESIDENTS: Those who own or rent property (including houses, condos, and mobile homes) in the state of California, which has the greatest amount of seismic activity in the country, must purchase their earthquake insurance through a CEA -approved insurance carrier. Launched in 1996 in response to the devastating 1994 Northridge quake, CEA is now the world’s largest residential earthquake insurer.

Best advice

With all of the potential hazards and pitfalls of property insurance, what is the best way to navigate the potential dangers safely and protect your assets?

Mike Nixon, director of agency operations for Armed Forces Insurance, suggests, “The best way for an individual to have the insurance protection they need is to do an annual review with their insurance agent. Whether their agent is local or a service representative with a direct writer like Armed Forces Insurance or USAA, they should be ready and willing to review the insurance needs of their clients or members and discuss [those] needs based on the location of the home. A review should also be done at the time of purchase of a home, auto, or other high-value item.”

When was the last time you conducted a thorough review of your P&C insurance? Don’t put it off any longer — call your agent today and make sure your valuable assets are properly insured.
 

Former Army Capt. Phil Dyer, CFP, is deputy director for financial education, Benefits Information. For financial advice, members can contact Garrett Planning Network at (866) MOAA-GPN (662-2476) or www.garrettplanning.com.