Covered for the worst storms to come? You may not be. | Opinion

Laveta Brigham

By Jay Feinman Hurricane Eta has passed through Florida, drawing to a close one of the worst hurricane seasons on record. This summer, New Jersey was struck by flooding rains from Tropical Storm Fay, and almost 1.5 million homes and businesses lost power and many suffered other damage as a […]

By Jay Feinman

Hurricane Eta has passed through Florida, drawing to a close one of the worst hurricane seasons on record. This summer, New Jersey was struck by flooding rains from Tropical Storm Fay, and almost 1.5 million homes and businesses lost power and many suffered other damage as a result of Tropical Storm Isaias.

What comes after storms or other destruction? After damage occurs, insurance claims are filed by people who have suffered losses. But many homeowners discover that they suffer from a substantial protection gap, because the insurance they bought to provide financial security won’t cover their losses.

Wildfires have ravaged the West this year, but in past California wildfires, two-thirds of the victims reported, in surveys by consumer advocacy group United Policyholders, that they were seriously underinsured. The problem is national; three of every five homes in America are underinsured by an average of 20% less than full value, according to analytics firm CoreLogic.

Many flood victims are in an even worse situation. Homeowners insurance does not cover flood damage, and too few people buy separate flood insurance. In areas most affected by Category 4 hurricanes Harvey, Irma and Maria, as many as 80% of homeowners in Texas, 60% in Florida, and 99% in Puerto Rico lacked flood insurance.

Homeowners need to do three things to make sure they are adequately protected from major losses: Buy the right insurance coverage, buy enough coverage and get help from the government.

First, homeowners need to make sure they have the right insurance. For most homeowners, insurance from the National Flood Insurance Program is the only coverage available against flooding. Although backed by the federal government, NFIP insurance is sold through private agents and insurers, and homeowners should assess their risk and decide if they need it. Even street flooding from heavy rain may be excluded from homeowner’s insurance, so flood insurance is important outside of high-risk, coastal areas as well.

When buying insurance, homeowners need to consider risks other than catastrophic losses, too. For example, most homeowner’s policies cover at least part of the loss if a pipe suddenly ruptures and causes damage to walls and ceilings. But many policies exclude coverage for pipes that leak gradually inside walls and eventually cause the same type of damage.

In short, consumers need to ask questions, read policy summaries and even ask for a copy of the policy before buying.

Second, homeowners need to make sure they have enough coverage. Most homeowner’s policies provide “replacement cost” coverage for the house — if there is a loss, the policy should pay the cost to repair the damage or replace the whole house. Replacement cost coverage typically is capped at the policy limits, however, and that may not be enough to pay the entire cost. The policy limits, usually provided by the insurance company, may be an inaccurate estimate of the real cost, particularly after a catastrophe when prices of labor and materials rise as many homeowners need to rebuild all at once.

It’s hard to obtain an accurate estimate of rebuilding costs, so homeowners should shop for “extended replacement cost,” which adds an additional 20% or more to the policy limits if needed, or even “guaranteed replacement cost,” which, as its name suggests, will pay whatever it takes to rebuild.

All that applies to the cost of rebuilding the house. Many policies will pay only the lower, depreciated value of damaged contents such as furniture and clothing. In that case, even though a new sofa might cost $1,000, the insurance will only pay the current value of a fire-damaged, 10-year-old sofa — perhaps $100 — and the homeowner has to make up the difference to replace the sofa. That can add up in a major fire, for example, so homeowners should consider purchasing replacement cost coverage for personal property, too.

Third, homeowners need to pressure legislators and insurance regulators to require better information and better coverage from insurance companies.

Insurance is complicated and technical, so consumers need effective shopping tools to help them understand what is available and what they are buying. States vary in how much information and in what form they require insurance companies to provide shoppers, and most states need to do a better job of guaranteeing meaningful, accessible information.

No matter how much information is provided, though, consumers can’t anticipate every contingency when shopping for insurance. Therefore, for decades states have mandated minimum standards of coverage, but they need to do more of that to fully protect homeowners. Policy terms that protect against typical large-scale losses and pay the full cost of those losses need to be required in every policy.

No one likes thinking about potential disasters but the current spate of catastrophes reminds us that bad things happen. Insurance is vital to the rebuilding process, and homeowners need to be more aware of their needs to prepare for losses that surely will happen again.

Jay Feinman is a distinguished professor at Rutgers Law School and co-director of the Rutgers Center for Risk and Responsibility. He’s also the author of “Law 101: Everything You Need to Know About American Law.”

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