Flood Insurance:  Don’t Wait

As we approach flood season, I thought it would be a good time to discuss the importance of flood insurance again.  The Town of Telluride has spent millions of dollars to mitigate future flooding along Cornet Creek.  However, there is also something individual homeowner’s can do to protect themselves.  Purchase flood insurance.

The truth is, most homeowners don’t give much thought to flood insurance until they see Noah’s Ark floating by the kitchen window.  That’s the problem.  Once the rains start, it’s already too late to think about it.

The most important piece of information I want you to take away from this article is that homeowner’s insurance DOES NOT cover damage caused by flooding.  That’s correct. Your homeowner policy will pay nothing if your house or contents are damaged in a flood, as defined by the Federal Emergency Management Administration (FEMA).  (The National Flood Insurance Program operates under the auspices of FEMA.)

First, let’s define flooding.  Without quoting verbatim the entire written definition as supplied by FEMA, we are basically talking about damage caused by “surface water”.  This can include, but is not limited to, the overflow of rivers and streams, or heavy rains.

If I asked you how many insurance claims involving fires we file in the United States every year versus flood claims, what would be your guess?  Ten fire claims for every one flood claim?  Twenty?

Actually, it’s a trick question.  The correct answer is the OPPOSITE of what most people think.  On average, there are twenty-six flood claims filed for every one fire claim in the United States.

“Why won’t insurance companies cover floods?” you may ask.  The answer is simple.  Insurance companies are all about spreading risk over large areas.  When you can have a whole neighborhood or town wiped out by a flood, the risk is not distributed over a large enough area for the insurance carriers to be able to absorb the loss.

Since flooding causes more home property damage in the U.S. than fires, why then, do so many homeowners ignore this important coverage?  Think about it.  If your home is in a high-risk flood zone, you are twenty-six times more likely to suffer damage from a flood than from fire.  Shouldn’t flood insurance be equivalent in importance to homeowner’s insurance when purchasing a home?

Again, the federal government thinks so.  That is why the Reform Act of 1993 was passed by the U.S. Congress.  This act outlines the requirements and responsibilities of lenders when it comes to loans on properties in certain flood zones.

The Town of Telluride is a participant in the National Flood Insurance Program.  David “Sam” Samuelson, Telluride Building Official, is a FEMA Certified Floodplain Manager.  FEMA, through the NFIP, has mapped the town and determined which flood zone designations to assign to each area.  The “A” flood zone designation is generally assigned to the highest risk areas.

To give you an idea of how this affects homeowners in Telluride, much of the north side of town (above Colorado Avenue) is in some type of “A” flood zone.  In addition, many areas on the south side of Colorado Avenue close to the San Miguel River corridor are in an “A” flood zone.

That is why lenders require borrowers to purchase flood insurance on homes and condominiums in much of Telluride.  It is not a conspiracy to add to your closing costs when purchasing a home.  The lenders are simply fulfilling their obligation under the Reform Act of 1993.

There are many misconceptions about what flood insurance covers and what it does NOT cover.  The basic purpose of flood insurance is to repair or replace your home and contents in the event of a flood.

By federal mandate, the maximum amount of coverage afforded by the NFIP for a single-family home is $250,000.  (For commercial properties, it is $500,000).

Obviously, in an area like Telluride, this limit is woefully inadequate to replace an entire dwelling.  The best an owner here can hope for is that the flood damage is limited to the basement or lower floor.  Hopefully, the $250,000 limit is adequate to repair this type of damage.

A complete review of flood insurance policies and the coverage they provide would require much more space than I have available here.  The purpose of this article is to hit some of the highlights and make homeowners aware of the possible need for flood insurance.

For more information about the NFIP program, please visit their website at www.floodsmart.gov.

The bottom line is, don’t wait ‘til the water is up around your ankles to think about flood insurance.

A Picture is Worth a Thousand Words

In case of a fire or other disaster, it is important to have a complete inventory of your homeowners contents and personal belongings.  The insurance adjuster will ask for a complete list of what you lost, what was damaged, and its approximate replacement cost.

Assuming you don't want to sit down and make a written inventory of everything in your home, the next best thing is to create a video record of your belongings.  Simply take photos or video of every room in your house.  Stand in the center of the room and do a 360 degree turn, taking photos or video.  Be sure to open up closets and photograph clothing and other items stored in the closet.

Be sure to store the photos online, or in a safe place off of your premises to keep them safe.

When the unthinkable occurs, you will be able to review the photos or video and create a list of the lost/damaged items for the insurance company.  It will make their job a lot easier and give you a better chance of recovering the replacement value of your loss.

Do it now before you forget!

Getting Proactive About Fire Danger

As wildfires rage in Arizona and New Mexico, it reminds me of the Fourmile Canyon fire several years ago in the foothills near Boulder, Colorado. Since we live in similar wildfire conditions, I thought it would be timely to discuss some of the lessons learned from Fourmile Canyon.

In that fire, over 165 homes were destroyed. Many of us remember seeing those homes burn on the evening news. What many people don’t realize are the problems that have occurred with the task of rebuilding those homes. According to a recent Denver Post article, only 28 building permits have been issued to rebuild those destroyed homes in the past nine months.

One of the main reasons for the slow pace of rebuilding is disputes with the insurance carriers over the replacement cost of the homes. You see, many of these ruined homes were under-insured. Not just under-insured by small amounts, but in some cases, by as much as 50%. This has created a significant problem for some of the insurance companies. Technically, they are only obligated to pay out based on the policy limit. (In some cases, the policy language allows for payment up to 25% over the scheduled limit.)

For those homeowners whose dwellings were undervalued by 30, 40, or even 50%, they may not receive enough in a payout to rebuild their houses.

Additionally, policy holders should be aware many policies contain a “Co-Insurance Clause” that allows the companies to decrease the amount of the payout if the replacement value was understated. This clause is intended to discourage under-insuring your property to save on premium.

In the situation of the Fourmile Canyon fire, it appears that many homeowners, either intentionally or unintentionally, under-stated the replacement value of their dwellings. In addition, it appears some of the insurance agents who wrote the policies may not have been adequately keeping up with the replacement values of the homes in this area.

Many facts pertaining to this situation are still in dispute, but one thing is clear. In my opinion, there was a breakdown in communication between the homeowners, their agents, and the insurance carriers.

The most important lesson homeowner’s can learn from the Fourmile Canyon fire is to communicate with your insurance agent on a regular basis. Review your policy at least once every two years and discuss the replacement value with your agent. Make sure the coverage is updated on a regular basis to prevent under-insuring your property.

In addition to disputes over the replacement value of the dwellings in Fourmile Canyon, there are battles over the contents amounts. Some homeowners, who did not have an inventory or photographic record of their personal belongings, are having a difficult time getting full payment from the insurance companies. Many are still waiting for payment.

What most customers don’t realize is that insurance companies require “proof of loss” before paying out on a contents claim. They will ask for a complete list and description of the items destroyed in order to come up with the replacement value.

This situation highlights the absolute necessity of keeping an up-to-date record of your contents. In my opinion, the best method is to take photographs or video of each room in the home. Keep these photos or video stored on-line or somewhere off-premises so that they are easily accessible in case of a loss. Viewing the photographic record will allow you to create a more complete list of the items damaged. In turn, the claims adjusters will appreciate that you are making their jobs easier and are more likely to work with you on resolving disputes.

We can expect to hear more about the disputes between homeowners and insurance carriers in the Fourmile Canyon fire in the future. The Colorado Division of Insurance is certain to investigate to determine whether the agents or companies involved violated state regulations. If you are a homeowner, take a few minutes to review your policy, discuss it with your agent, and perhaps you can avoid similar problems should disaster strike your home.