There is a commercial on the airwaves where scenes from inside a home where a flood occurred are shown while background voices are heard. One of them says, “What you mean it doesn’t cover water damage?” The theme is that after a detrimental event occurs is not the time to find out what is not covered in a homeowners insurance policy.
Sometimes, the lack of knowledge isn’t about what the policy covers, but rather the risk. Homeowners may be lulled into a false sense of complacency believing that there is no danger of a flood in their area, for example, and so they omit that coverage from their policy. However, it is important to point out that according to FloodSmart.gov, “Floods and flash floods happen in all 50 states.” More surprising is their claim that “Everyone lives in a flood zone.”
It is important to fully understand all of the risks involved in the area where a home exists when purchasing insurance, and it is also important to understand what is and is not covered in the policy. Knowing the risk of a flash flood doesn’t do much good with the standard homeowners policy, since floods are not typically covered! Worse, many people still do not know this fact, and when a flood occurs, it is too late.
There are different types of homeowner insurance, and it is important if you have an older policy to ensure it is not the lowest level of insurance, HO-1, as it barely covers anything at all. According to an Insure.com article titled “Home insurance exclusions: What your policy won’t cover”, many insurance companies no longer sell HO-1 policies, and may even be illegal in some areas. The HO-2 policy isn’t much better in that it covers only “16 perils”, even though it is often called the “broad form”. It is important to understand that these two types of insurance only cover what is explicitly stated, and anything else is not covered.
This is different than the HO-3 level, or “special form” policies. This type of insurance covers everything that is not specifically excluded. Even at this level, water damage is not normally covered, so just because it is the most comprehensive does not mean it is necessarily complete.
In fact, HomeInsurance.org lists “Three Common Exclusions Found In Homeowners Insurance Policies”, and the very first item listed is “flooding and water damage”. Typically, earthquakes and governmental regulations are also excluded. In the last category, they give the example of the construction cost of bringing the building up to code. Fixing “faulty or flawed construction” is not covered by most homeowner policies.
HomeInsurance.org makes a good point in that “Homeowners insurance is protection against anticipated losses”. It is not a catch-all for the slightest of issues. For example, the Global Post adds a fourth area to the list of exclusions on standard policies, “Maintenance and inherent vice exclusions”. Rodents chewing on wires is not included. Spoiled food in the refrigerator due to a power outage is also not covered.
In fact, a related issue to maintenance is the fact that no policy is going to cover cost due to neglect. This includes properly reacting to a catastrophic event, which itself may be covered if dealt with in time. However, if not dealt with, then subsequent issues will probably not be covered. Vandalism or causing intentional damage in order to game the insurance system is fraud, and that is not covered.
Hurricane Katrina made clear the importance of having the proper coverage against flood and water damage, but the accident at Fukushima makes it clear that almost no insurance covers nuclear accidents. According to Deutsche Welle, a German news organization, the insurance industry is nervous over the event and “It’s essentially impossible to define an upper limit for the amount of financial damage a nuclear disaster can cause. That’s why no insurance company worldwide is willing to completely cover the consequences of a worst-case nuclear catastrophe.” In spite of partial insurance, the German Nuclear Reactor Insurance Association will not be paying anything due to this incident. In fact, the article states that only one small payout was ever given due to a nuclear incident ever.
Obviously, this article isn’t about whether or not to live in those areas, but rather it is intended to reveal what risks there are in the standard homeowner policy and enable the reader to apply them to their specific circumstance. Any number of factors may influence the cost of a given type of insurance in any given area, but it is better to know what is covered beforehand than to receive a rude awakening after being told that a specific event is not covered.