The earthquake and tsunami in northern Japan has prompted homeowners everywhere to double-check their coverage. But those who decide that more coverage will help them sleep better may find an unpleasant surprise: Premiums are expected to spike.
The costs of earthquake insurance and flood coverage were already climbing, even before the disaster in Japan (and that, analysts say, won't help pricing either). Earthquake insurance premiums jumped by as much as 58% in some regions, says Mike Chaney, commissioner of insurance for Mississippi. They now costs anywhere from $100 to $3,000 annually depending on where you live. Flood coverage costs an average of $570 a year, up 4% from 2009. And those costs are expecting to keep rising, says Drew Woodbury, an equity analyst covering insurance at Morningstar.
What's driving the uptick? Insurance premiums move up after more claims are filed, and over the past few years U.S. homeowners have filed thousands of claims related to the series of hurricanes in the South and Midwest, says Chaney. Another jump in claims is expected next year if more devastating hurricanes and other natural disasters occur. On top of that, a proposal in Congress could also boost annual premiums by as much as 20% as part of a plan to overhaul the federal government's flood insurance program, itself underwater by $18 billion.
These higher premiums come just as natural disasters are happening more frequently, says David Neal, director at Oklahoma State University's Center for the Study of Disasters and Extreme Events. There is now a 50% chance that at least one major hurricane will hit the East Coast this year, up from 31% historically, according to a study from Colorado State University. Earthquakes are also becoming more common: On average, 15 magnitude-7 earthquakes occur worldwide each year, says Dr. Harley Benz, a seismologist at the U.S. Geological Survey. But in 2010, that number spiked to 21, and already this year there have been seven, according to the USGS.
Not every homeowner needs the extra coverage. But while basic homeowners' insurance usually protects again fire and lighting, it often doesn't cover floods, earthquakes and other natural disasters. Consumers instead need to purchase additional policies. One thing to consider, say experts: Do you stand to lose more paying premiums every year or saving that money to possibly pay for repairs should a disaster occur? Over 10 years, flood insurance premiums could cost up to $27,340, for a high-risk home with $250,000 in coverage to rebuild the house and $100,000 to cover the contents, according to the Federal Emergency Management Agency, which runs the National Flood Insurance Program. The typical cost to repair a basement after a flood of six inches is about $25,000, not including the cost of replacing furniture, appliances or belongings, according to FEMA.
Of course, homeowners can also avoid these expenses by moving to less disaster-prone areas. Individuals can research the country's earthquake and flood zones for safer places to live. Also, before moving, check with a lender; most will tell borrowers they're moving into a high-risk flood zone and make sure they sign up for flood insurance.
3 What kind of insurance do you need?
Here are three common kinds of disaster insurance homeowners may want to consider:
In most cases, basic homeowner insurance policies don't cover damage caused by earthquakes. Depending on the home and its location, homeowners can be on the hook for $300,000 or more to fix foundation and other major damages, says Scott Simmonds, an independent insurance consultant in Saco, Maine. "This is the single most catastrophic loss that people don't have insurance for," he says.
The cost of the policy varies, depending on how close a home is to a fault line and its construction. Wood-frame homes, for example, typically have lower premiums because they usually withstand earthquakes better than homes made of brick, says Loretta Worters, a vice president at the Insurance Information Institute. On average, a 2,000 square-foot wood frame house in Buffalo, N.Y., with a replacement value of $250,000 would cost $100 or less a year to insure, according to the III. (A 5.0-magnitude quake rattled plates in Northwestern New York last year; no one was injured.) In California, where earthquakes are common, premiums average $500 but can cost upwards of more than $3,000 a year.
Flood insurance is not just for people living near the beach. Insurers generally define "floods" as any water that rises from the ground, which includes tidal waves, but also any destruction from rapid snow melts for those living near lakes, rivers or mountains. For those who qualify, flood policies can cost anywhere from a few hundred dollars annually to nearly $3,000 for people who live in high-risk areas, says FEMA. Renters can also sign up to protect their belongings from flood damage, and premiums cost at least $50 a year. Most homeowners in flood zones will have to sign up for this policy while they're paying down the loan on their home. And homeowners who want coverage beyond $350,000 for the home and its contents will have to shop in the private market where premiums can surpass $3,000.
But in some cases, homeowners who need flood insurance can't qualify because the risks in an area are too high. This includes homes on or near marshes and some coasts that the U.S. Fish and Wildlife Service classifies as part of the Coastal Barrier Resources System.
Sewer backup coverage
To make matters complicated, some types of floods aren't covered by a basic home insurance policy or flood insurance policy. Sewer and drain riders typically cover damage from isolated floods, like when a basement drain backs up. Flood insurance, in contrast, doesn't kick in when just one home gets flooded: A number of homes or a larger area of land need to be affected. But plumbing mishaps like a frozen pipe bursting are often covered by homeowner's insurance, says Simmonds. On average, the policies which are helpful for homes with a basement or crawl space that's prone to flooding cost about $40 a year, according to the III. Even over 10 years that cost is significantly cheaper than at least roughly $25,000 that will be needed to remodel a basement after flood damage.