Many insurance policies do not protect against loss from floods or earthquakes. This is due to the massive risk that both pose. Whereas theft, fire and other types of incidents generally affect one dwelling at a time (or a small group), floods and earthquakes usually affect a large number of homes if they affect one. An insurance company’s financial resources could quickly be consumed (the company bankrupt) if it insured against an event that affect too many of its policyholders.
In fact, this risk is so high that private insurers don’t offer flood insurance. Flood insurance can be purchased through a private insurer, but the policy is actually with a federal institution, the National Flood Insurance Program. Without the backing of the federal government, flood insurance would be too expensive for those who need it. This is principally due to the fact that the people who need flood insurance the most are the same people who are most likely to buy it. The greater the likelihood of flooding, the more people who purchase the insurance. This phenomenon, which is known as adverse selection, means that it is virtually guaranteed that an insurer will suffer massive losses at some point in the future. If left to private insurers, premiums would be astronomical for homeowners living in high-risk areas.
While some may argue that those people should either pay for the insurance themselves if they want to live in a flood plain, or move if they don’t want the cost of insuring against the inevitable, this ignores the fact that most fertile farmlands are often located in flood plains. Since the Federal government wants to encourage farming, to feed the nation’s people (and most Americans enjoy eating at some point during the day), the government assumes the risk of loss to keep farmers in the fertile farmland.
This is slightly different from earthquake insurance. While the phenomenon of adverse selection applied to earthquake-prone zones as well, the fact that there is no need to incentivize people to live in these areas means that there is no need to subsidize the cost of insurance. Earthquakes that cause considerable damage are also considerably less frequent than floods are. While a major earthquake could cause massive damages to concentrated areas, the likelihood of this happening is relatively low (at least in terms of a human being’s lifetime). Therefore, earthquake insurance is offered through private insurance companies. Some States, such as California, have enacted laws to ensure that homeowners are offered reasonable protection (insurance companies operating in California that provide homeowners’ insurance must offer an earthquake rider). Most States have not enacted similar laws, but rather leave it to the free-market to offer protection and set prices for earthquake insurance.
Purchasing both flood and earthquake insurance is generally done through a comprehensive standardized insurance policy (e.g. buying a HO5 rather than a HO1 policy) or by purchasing an endorsement for that specific event. There are a few factors that should be weighed when deciding whether to purchase flood or earthquake damage.
The first thing to consider is whether you are at risk. Do you live in a flood plain or at the top of a mountain? Are you in the middle of the continent where very few (if any) earthquakes occur or are you located along a fault line? Obviously, if you don’t need it, you shouldn’t buy it.
In regards to flood insurance, note that most homeowner’s insurance policies cover water damage resulting from things like burst pipes or a cracked bathtub. These are not classified as “flood” events. However they may not cover damage from a leaky roof in the event of excessive rain, which may be considered a flood event.
The next consideration is whether it is required by your mortgage lender. Mortgage lenders obviously have a vested interest in making sure that your dwelling (and your property overall) is adequately insured. Should your home be damaged or destroyed by a flood or earthquake, mortgage lenders want to make sure that you are able to pay back the full amount of the mortgage. In general, mortgage lenders only require flood or earthquake insurance in areas that are in a high-risk zone.
One of the most common misconceptions about flood insurance is that it is only for homeowners who live near major bodies of water. Floods can affect Americans across the nation. An example of a person that may wish to have flood insurance without living close to water is found with anyone that lives in a desert city, such as Phoenix, Arizona or Albuquerque, New Mexico. Both of these locations are not in the immediate vicinity of strong lakes or rivers that are prone to flooding, but the peril is still a valid risk. In a desert city environment, flash floods can be a major concern and can actually cause more damage to a home as the structures are not as well prepared as other flood areas. The sand and concrete allow little chance for water to escape during a heavy rain storm.
While flood insurance may still be a good idea for a person that does not live close to water, the same cannot be said of earthquake insurance. In regions where there is little documented history of earthquakes, there is little advantage to buying this specific type of policy. An insurance professional will be able to give a potential insurance buyer the relevant information about earthquakes in a local area to determine whether it will be a worthwhile purchase or not.
If you want to be absolutely covered in the case of any losses, purchasing flood and earthquake insurance is the way to go. Be sure to price out the policies though. You may be surprised, pleasantly or not so pleasantly, about the costs, depending on where you live. Be sure to compare homeowners’ insurance quotes to find the most affordable insurance policy for your needs.
Many insurance policies do not protect against loss from floods or earthquakes. This is due to the massive risk that both pose. Whereas theft, fire and other types of incidents generally affect one dwelling at a time (or a small group), floods and earthquakes usually affect a large number of homes if they affect one. An insurance company’s financial resources could quickly be consumed (the company bankrupt) if it insured against an event that affect too many of its policyholders.
In fact, this risk is so high that private insurers don’t offer flood insurance. Flood insurance can be purchased through a private insurer, but the policy is actually with a federal institution, the National Flood Insurance Program. Without the backing of the federal government, flood insurance would be too expensive for those who need it. This is principally due to the fact that the people who need flood insurance the most are the same people who are most likely to buy it. The greater the likelihood of flooding, the more people who purchase the insurance. This phenomenon, which is known as adverse selection, means that it is virtually guaranteed that an insurer will suffer massive losses at some point in the future. If left to private insurers, premiums would be astronomical for homeowners living in high-risk areas.
While some may argue that those people should either pay for the insurance themselves if they want to live in a flood plain, or move if they don’t want the cost of insuring against the inevitable, this ignores the fact that most fertile farmlands are often located in flood plains. Since the Federal government wants to encourage farming, to feed the nation’s people (and most Americans enjoy eating at some point during the day), the government assumes the risk of loss to keep farmers in the fertile farmland.
This is slightly different from earthquake insurance. While the phenomenon of adverse selection applied to earthquake-prone zones as well, the fact that there is no need to incentivize people to live in these areas means that there is no need to subsidize the cost of insurance. Earthquakes that cause considerable damage are also considerably less frequent than floods are. While a major earthquake could cause massive damages to concentrated areas, the likelihood of this happening is relatively low (at least in terms of a human being’s lifetime). Therefore, earthquake insurance is offered through private insurance companies. Some States, such as California, have enacted laws to ensure that homeowners are offered reasonable protection (insurance companies operating in California that provide homeowners’ insurance must offer an earthquake rider). Most States have not enacted similar laws, but rather leave it to the free-market to offer protection and set prices for earthquake insurance.
Purchasing both flood and earthquake insurance is generally done through a comprehensive standardized insurance policy (e.g. buying a HO5 rather than a HO1 policy) or by purchasing an endorsement for that specific event. There are a few factors that should be weighed when deciding whether to purchase flood or earthquake damage.
The first thing to consider is whether you are at risk. Do you live in a flood plain or at the top of a mountain? Are you in the middle of the continent where very few (if any) earthquakes occur or are you located along a fault line? Obviously, if you don’t need it, you shouldn’t buy it.
In regards to flood insurance, note that most homeowner’s insurance policies cover water damage resulting from things like burst pipes or a cracked bathtub. These are not classified as “flood” events. However they may not cover damage from a leaky roof in the event of excessive rain, which may be considered a flood event.
The next consideration is whether it is required by your mortgage lender. Mortgage lenders obviously have a vested interest in making sure that your dwelling (and your property overall) is adequately insured. Should your home be damaged or destroyed by a flood or earthquake, mortgage lenders want to make sure that you are able to pay back the full amount of the mortgage. In general, mortgage lenders only require flood or earthquake insurance in areas that are in a high-risk zone.
One of the most common misconceptions about flood insurance is that it is only for homeowners who live near major bodies of water. Floods can affect Americans across the nation. An example of a person that may wish to have flood insurance without living close to water is found with anyone that lives in a desert city, such as Phoenix, Arizona or Albuquerque, New Mexico. Both of these locations are not in the immediate vicinity of strong lakes or rivers that are prone to flooding, but the peril is still a valid risk. In a desert city environment, flash floods can be a major concern and can actually cause more damage to a home as the structures are not as well prepared as other flood areas. The sand and concrete allow little chance for water to escape during a heavy rain storm.
While flood insurance may still be a good idea for a person that does not live close to water, the same cannot be said of earthquake insurance. In regions where there is little documented history of earthquakes, there is little advantage to buying this specific type of policy. An insurance professional will be able to give a potential insurance buyer the relevant information about earthquakes in a local area to determine whether it will be a worthwhile purchase or not.
If you want to be absolutely covered in the case of any losses, purchasing flood and earthquake insurance is the way to go. Be sure to price out the policies though. You may be surprised, pleasantly or not so pleasantly, about the costs, depending on where you live. Be sure to compare homeowners’ insurance quotes to find the most affordable insurance policy for your needs.
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