When Hurricane Isabel tore through the Mid-Atlantic region last week, it left nearly $1 billion in damage in its wake. Although the loss is catastrophic to the affected homeowners and businesses, Isabel was mild compared to 1992's Hurricane Andrew or Hurricane Floyd in 1989.
However, Hurricane Isabel, together with the major tornadoes that hit the Midwest earlier in the year, makes 2003 a relatively bad year for catastrophe-related losses, the Insurance Information Institute says. According to the Insurance Services Office, insured catastrophe losses through August 2003 totaled $7.6 billion compared to $5.9 billion for all of last year.
"Virtually every part of the country is at risk for billion dollar disasters," says III chief economist Bob Hartwig, and as a result, homeowners insurance rates are on the rise. The III estimates that insurance rates will climb approximately 7% in 2003 and up to 8% in 2004.
But, Hartwig points out, "Isabel also once again proves the importance and value of homeowners insurance coverage [when it comes to] helping people recover from real disasters." And the more you know about your coverage, your home's value and contents, the easier it will be to pick up the pieces after disaster strikes.
Know your policy
The key to protecting your property is to make sure your homeowners policy covers at least 80% of what it would cost you to rebuild your home. The closer you can get to the actual replacement costs, though, the better.
The biggest mistake people tend to make is to base their replacement-cost estimates on the house's market value. The amount of money someone would pay for the house has absolutely nothing to do with the house's replacement value.
The real replacement cost is what it would cost you to rebuild your home using the same types and quality of materials at today's market prices. And if it's been several years since you took out your policy, now may be a good time to update that estimate.
As premiums balloon, what policies actually cover is getting skimpier. First to go was guaranteed replacement-cost coverage, which most insurers eliminated within the past three years. With it, insurers pay the full cost to replace your home, no matter how much coverage you had. If you insured your home for $200,000 but it ended up costing $300,000 to rebuild it, the insurance company was on the hook for an extra $100,000. But now most insurers cap payouts at 120% to 125% of your coverage amount. It's up to you to make sure the dollar amount set in your policy keeps up with construction costs.
Also keep in mind that homeowners policies only cover damage from wind and rain, they will not cover damage from floods. So if you're afraid the nearby creek will leave its banks and flood your basement, consider a flood policy from the Federal Emergency Management Agency. Ask your insurance agent for a flood plan or call the National Flood Insurance Program at 800-427-4661. But don't wait for the next big rain -- flood insurance takes 30 days to activate.
Be prepared
Rebuilding your house is one thing, replacing what was inside is totally another. Losing everything to a storm, flood or fire is emotionally devastating. Do you think you'd be able to accurately fill out a claim form?
Avoid the trauma by taking a household inventory now. Turn on your video camera and walk through your home describing all of your possessions. Or, if you prefer, ask your insurance agent for an inventory booklet or print out IRS Publication 584,Casualty, Disaster and Theft Loss Workbook.
Once your inventory is complete, make copies and keep them in your office or in a safe deposit box. If you ever need it, your inventory will help prove the value of the possessions that were damaged, speed up your claim and provide a record for tax deductions.
In most cases, renters don't have to worry about repairing the damage to their homes, but they still need to protect their belongings. Landlords are not responsible for your personal possessions. Find a renters insurance policy with replacement-cost coverage. For $30,000 worth of coverage, expect to pay about $250 a year.
When disaster storms your home
When the danger has passed, notify your insurance agent to get the claims process moving as quickly as possible. Now is not the time to argue with your neighbor or the city about the tree that fell through your roof. Let your insurance company sort it out.
Take pictures of the full extent of the damage before doing any cleanup.
And do not get pressured to into a working with an unfamiliar contractor. Unscrupulous contractors will swarm a disaster area looking for easy money. Some tips to consider include:
Shop around for estimates.
Get references if possible.
If not, at least check with the Better Business Bureau in the contractor's home state.
Be sure the contractor has proof of insurance, including disability and worker's compensation.
Always use a contract and keep a copy of it.
Don't pay until all supplies have been paid for and the job is 100% complete.
Uncle Sam can help
If your neighborhood turns into a federal disaster area, you can apply for assistance through FEMA at 800-621-3362. You could also check with your state's emergency management agency to find out about assistance for state-declared disasters.
And if you have uninsured losses, the IRS will share your pain at tax time. If you itemize and your uninsured loss minus $100 exceeds 10% of your adjusted gross income, you can claim the deduction. Our calculator can help you total up the numbers.
You'll have to pinpoint your loss, which could involve comparing appraisals for the value of your property before and after the damage occurred. And be sure to hang onto newspaper clippings that describe the calamity's location and intensity, proof of ownership of the damaged property and receipts for repairs. For more on claiming the deduction, see IRS Publication 547, Casualties, Disasters and Thefts.
GETTING STARTED
