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Insurance For Natural Disasters: Floods, Fires, Hurricanes, Earthquakes Oh My

Updated: 01/06/2022 by Financial Samurai 90 Comments

Natural disaster insurance - Floods, Hurricanes, Fires, Earthquakes Oh My

Understanding what natural disaster insurance is and whether it’s worth it is important if you live in a high risk area. Let’s learn how floods, wildfires, hurricanes, and earthquakes are covered under an insurance policy for natural disasters.

I’m a multiple property owner in San Francisco which is a high risk area for earthquakes. Over the years I’ve felt dozens of earthquakes here. Fortunately, none of them were large enough to cause any damage. Since I moved here, I’ve researched natural disaster insurance for earthquakes quite a lot over the years.

A Natural Disaster Can Strike At Anytime

Before I sold my house in the Marina district of San Francisco, I always had a slight worry whether it would survive the next big earthquake. The Marina district is a highly desirable neighborhood in the north end of San Francisco. But, it is mostly underlain by saturated silts and sands that may liquefy if another large earthquake hits.

The last big earthquake in San Francisco was the Loma Prieta earthquake on October 17, 1989. It killed 63 people and collapsed a section of the Bay Bridge. In addition, it caused several buildings to burn down in the Marina due to ruptured gas pipelines.

Natural Disaster Insurance Is Expensive

However, each time I got a mandatory earthquake insurance offer in the mail, I passed. The deductible (10% of value of home) was so high and the premium ($5,000+/year) was too expensive.

I’d ignore the risk I was taking until I’d get the same offer in the mail the next year. I figured worst case, I’d have to spend $650,000 rebuilding a 2,300 sqft structure.

Now that I don’t own a home surrounded by liquefaction, I do feel a sense of relief. It’s as if I “escaped” almost 13 years of ownership without experiencing a natural disaster.

Fear Mongering Abounds

So many people who don’t live in San Francisco constantly reminded me about the risks of earthquakes before I bought. Then after I bought, even more people from SF who didn’t/couldn’t buy a home tried to instill fear in me.

What gives folks? Can’t you just be happy for someone’s largest purchase?

As a result, I worried about earthquakes while I was in the process of selling my home. Selling a home is much more stressful than buying a home.

If you don’t buy a home, there is no loss except for dashed dreams. If your home falls out of contract when selling, vultures will start circling.

Devastations seem to happen around the country every year. Thus, I’ve begun to wonder again if I should get natural disaster insurance to cover my remaining properties.

My homeowner insurance policy already covers fire damage. Yours may or may not.

Related: Does homeowners insurance cover fires?

Natural Disasters Affect More Than Homes

What I didn’t realize was how much damage storms can do to cars. For example, it’s estimated that Hurricane Harvey ruined 500,000 cars by flooding their engines. 

Similarly, Hurricane Sandy destroyed about 250,000 vehicles. And Hurricane Katrina claimed about 200,000 according to Jonathan Smoke, chief economist at Cox Automotive.

Therefore, it behooves everyone to ping their auto insurance companies today. Ask about the exact coverage you have. I bet most people have no idea how much they’re paying and what it really covers.

I called my auto insurance company and was reminded I have comprehensive insurance on my new family car with a $500 deductible. This surprised me because I thought I was paying for a $1,000 deductible. At least now I know.

Comprehensive insurance should cover your car from flood damage, hail, a tree falling on your hood, and everything else you can think of. You’ll usually be reimbursed for your ride’s actual cash value (ACV) after you pay your comprehensive deductible.

Natural Disaster Insurance Can Save You From Bankruptcy

What’s shocking is that only about 20% of the 1.6 million homes in Harris County, where Houston is located, had flood insurance, according to emailed data from the Insurance Information Institute. For those homes in “high-risk” areas, only 28% of the homes had flood insurance.

Please think about this scenario for a moment. Let’s say you’re a proud homeowner without natural disaster insurance. Then a natural disaster destroys your home unexpectedly. If you have a mortgage to pay, a car to replace, and a home to rebuild out of pocket, there could be no way out of this type of financial disaster except for bankruptcy. 

Besides private insurance companies, the federal government offers special coverage for high risk areas. For example, they offer flood insurance coverage through the National Flood Insurance Program at an average cost of about $700 per year. Of course, the premiums vary depending on your property’s flood risk and value of the house.

For low-risk homes with the maximum coverage of $250,000 for the dwelling and $100,000 for possessions, the premiums are about $405 per year, or $452 if you have a basement. If your home is of higher value, it looks like private insurance companies may be your only option.

Here’s a video that really shows how Hurricane Harvey affected one person’s home and cars. The fella successfully saved three BMWs, but could not protect his home from damage.

I’m pretty sure after seeing this video, if you live in a high risk area, you’ll be motivated to explore as many homeowners insurance policies as possible!

How To Decide Whether To Get Natural Disaster Insurance

Insurance companies stay in business because they collect more in premiums than they pay out in claims. It’s actually a great business if you look at the profit figures of all the major insurance companies.

Therefore, as a consumer, you probably don’t want to get more insurance than is required by law because you know it’ll likely never be used. That said, here’s a checklist that may help you determine whether getting flood or earthquake insurance is a good move.

Here are some questions to think about and helpful suggestions on how to decide whether to get natural disaster insurance or not.

Do you live in a high-risk area? 

If you live in an eastern coastal state, Texas, Louisiana, or Hawaii, you are subject to hurricanes. Those who live west of the Rockies, in Alaska, New England, or along the Mississippi River, are subject to earthquakes.

In addition, if you live right on a coast, or in any low lying area, you are subject to floods. If you own a beachfront property, the ocean may eventually reclaim some of your property. Such property loss will hurt the value of your property, so be aware.

Basically, a natural disaster can strike anywhere at anytime.

Map of high risk areas of the United States for natural disasters
Source: Redcross, noaa.org. Nowhere to hide, except in Michigan! But then you’d freeze to death.

When was the last time you invested in natural disaster mitigation?

After the 1989 earthquake in San Francisco, homeowners in danger zones were mandated to “earthquake proof” their homes with stronger foundations. All new construction after 1989 also requires stricter foundation construction.

As a result, buildings are now safer than ever before. Obviously we won’t know how strong our homes are until angry nature comes. But we should believe the more we invest in natural disaster mitigation, the better we will come out at the other end.

Although my new primary residence is not on liquefaction, I did spend some money reinforcing the structure and applying new bolts to the frame. In addition, the condo association at one of my rental properties is spending about $100,000 – $130,000 retrofitting our building due to an SF law.

Earthquake risk map
Earthquake risk map

Have you talked to your long time neighbors?

One of the first things I did before and after I bought my house in the Marina district was ask my neighbors how the 1989 Loma Prieta 6.9 earthquake affected our block.

One 69-year-old neighbor who has owned his building since 1975 told me not a lot happened at all. Some dishes fell off the shelves, but that was about it.

However, five blocks west of us several houses had to redo their facades due to cracks. The houses that sustained structural damage were situated 15 blocks away as they were built on top of sand.

Toppled Marina building due to 1989 earthquake
Roughly 8 blocks away from my old house in the Marina

What is the estimate of potential damages?

After speaking with my neighbors and researching the 1989 earthquake, I made a realistic $100,000 damage estimate if a similar 7.0 magnitude earthquake hits.

Then I compared that $100,000 estimate to my earthquake insurance deductible of $150,000 + $5,000 in annual premiums. Ultimately, I decided it wasn’t worth it.

When you’re trying to decide if you should purchase natural disaster insurance, it’s important to assess realistic estimates of what a disaster might cost you out of pocket.

How big is your emergency savings?

The less emergency savings you have, the more you may need natural disaster insurance. If disaster strikes, you could borrow from your 401K, draw money from a HELOC, or go directly to friends and family.

However, you probably don’t want to resort to that. One of the keys to achieving and maintaining financial independence is planning for unexpected emergencies.

This is in addition to everyday budgeting and retirement planning. Otherwise, all of the wealth you’ve created could be greatly jeopardized.

Tornado risk map of United States
Tornado risk map

How dependent is your retirement on your home?

Our homes are often our largest asset. Thus, there’s no doubt many people count on their homes to provide rent-free security once the mortgage is paid off. Or rental income if they are a landlord in retirement.

Some may even depend on their homes to do a reverse mortgage for income. Whatever the case may be, the higher your home is as a percentage of your net worth, the more you need to consider getting natural disaster insurance.

Related: What Is The Average Net Worth For The Above Average Person?

Flood risk map of the United States
Flood risk map

How much equity do you have in your home?

This is probably the only situation where having little to no equity is a good thing if a natural disaster strikes.

Potential disasters are one of the biggest reasons why people should not pay down their mortgage. If you had the ideal mortgage amount of $1 million, your bank ends up eating the cost if you run away.

Find out if you live in a non-recourse state here.

What If The Natural Disaster Is Really Bad?

The only positive out of a really bad situation is that the Federal Emergency Management Agency (FEMA) might step in to provide grants for emergency repairs and temporary housing.

Meanwhile, the Small Business Administration (SBA) may offer up to $200,000 in low-interest loans for rebuilding.

Rebuilding costs soar during times of emergency. This is largely due to an upward shift in the demand curve. Inevitably, there may also be price increases by suppliers of materials and services to help mitigate such a surge in demand.

Lines for gas at the pump may last for hours. Meanwhile electricity might not come back on for weeks, if not months.

The worst feeling is losing everything and not knowing if you will ever recover if you don’t have natural disaster insurance. Then, the second worst feeling during a disaster situation is having insurance, and not knowing whether you will ever collect.

Here’s a video highlighting what type of damage Category 1 – 5 hurricanes can do. For those who are investing in heartland real estate, it’s best to bake in potential natural disaster damages into your returns.

Build Goodwill With Your Insurance Provider

It’s unfortunate to hear so many frustrating stories about insurance companies not paying out a claim when something bad happens. The only thing I can recommend is to go with an insurance carrier that’s been around a long time.

In addition, select a provider with a healthy balance sheet. Use them for multiple financial products to build good will so they decrease the chance of screwing you.

For example, you may want to bundle your auto, property, umbrella policy, and flood insurance together. Your agent will love you, and you will be tiered as a more valuable customer. Thus, they should give you less grief with claims, and should also give you the best rates.

Once, I filed a $7,500 claim for a lost watch (lost it on the beach or somewhere in Oahu). I spoke to the personal property insurance agent for 10 minutes, answered questions, and got a check for $7,500 three weeks later.

They didn’t give me a hard time because they’ve been making lots of money off me for the past 20 years.

More Assets, More To Worry About

With record breaking temperatures, massive wildfires, and violent hurricanes each year, there’s something to be said about having only one car and one house. Otherwise ongoing maintenance and insurance costs really start putting a damper on your sense of freedom.

Get Insured Today

If you’re in an area prone to natural disasters, explore as many homeowners insurance policies as possible. And look into the costs and coverage of natural disaster insurance.

Compare the insurance premiums to the cost of a total rebuild and make a calculated decision. There is no such thing as retroactive insurance!

Each year that goes by without paying insurance premiums is a win. But after many years of winning, you might want to use your winnings to sleep well for the rest of your life.

Related posts:

How Does An Umbrella Policy Work?

A Preliminary Guide To Auto Insurance

The Ideal Amount Of Homeowners Insurance To Protect Your Family

Readers, do you have flood or earthquake insurance? If so, what is your coverage and monthly premium? Has your home or car ever gone through a natural disaster? What was the cost to rebuild/replace? 

Note: You can’t really game an insurance company and get flood insurance right before a big hurricane hits. You usually have to wait at least 30 days before the insurance kicks in. 

For more personal finance content, subscribe to my free weekly newsletter. I’ve been writing about living the lifestyle you want with the money you have since 2009.

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Filed Under: Insurance

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

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Comments

  1. Houston Ann says

    September 14, 2017 at 11:43 am

    I live in Houston and was at ground zero for the flooding. We are near a bayou and the intentional dam releases by the Army Corp of Engineers flooded our house with 7 feet of water. We also lost both cars. The water in our house just went down a few days ago – after it was full of disgusting, scummy water for two weeks. Fortunately we do have flood insurance, but it is limited. It does not pay replacement cost on things (it pays a set amount) and does not cover relocation costs. We are now paying a mortgage for an unlivable house, trying to replace one floor of belongings, buying two replacement cars and paying for a rental townhouse.

    Here is part of our story:
    Life Changes Overnight – Surviving Hurricane Harvey Dispatch #1 https://journal.thriveglobal.com/life-changes-overnight-50eb6dbc0fbb?source=linkShare-6c47df2e725a-1504440916

    Cat rescue and grocery shopping – Surviving Hurricane Harvey Dispatch #2 https://journal.thriveglobal.com/cat-rescue-and-grocery-shopping-8ce92f64c0d?source=linkShare-6c47df2e725a-1504440952

    Stuff is not supposed to matter, but it kinda does… – Surviving Hurricane Harvey #3. https://medium.com/@annwhowell/stuff-is-not-supposed-to-matter-but-it-kind-of-does-733c39b02998?source=linkShare-6c47df2e725a-1504539839

    Water Taxi and Mandatory Evacuation…It’s Not Over Yet. Surviving Hurricane Harvey Dispatch #4. https://medium.com/@annwhowell/water-taxi-and-mandatory-evacuation-its-not-over-yet-3d721dfb108d?source=linkShare-6c47df2e725a-1504542460

    Reply
    • Financial Samurai says

      September 15, 2017 at 11:02 am

      Those are some incredible pics. 7 feet high is crazy. Very sorry for your loss. Where are you living now while the house is being repaired?

      Glad you have at least some flood insurance to defray costs!

      I read some story in the NY Times about how nothing will stop the Houston real estate market. Do you feel the same way?

      Reply
  2. Bob Dye says

    September 10, 2017 at 12:56 pm

    You recommend taking pictures when walls are open. I couldn’t agree more, and for reasons some may not consider. We recently had a professional grade range hood installed over our cooktop and hired a mechanical contractor to plumb the exhaust piping through the roof (we previously had a microwave oven with a built-in hood that recirculated the exhaust into the kitchen through charcoal filters, which has become unacceptable as I have begun to suffer from severe chemical sensitivities). There was a question as to whether there would be a truss in the way above the ceiling, requiring expensive rerouting of the piping, and with 20″ of cellulose insulation in the attic, I really didn’t want to crawl up there to see.

    While debating how to answer this question it occurred to me that I had taken pictures when I installed vented aluminum soffett in the eves when I had a new roof installed a few years ago. Those pictures showed me exactly where the rafter tails are and I was able to determine that there would be no interference for the piping. This in turn enabled the contractors who submitted bids to give me precise estimates rather than a price range because of structural uncertainty.

    Reply
    • Financial Samurai says

      September 10, 2017 at 1:43 pm

      Bingo!

      Reply
  3. Frank Vanderpool says

    September 9, 2017 at 8:55 am

    Just wondering if hurricane insurance covers storm surge damage? A lot of Katrina claims were turned down due to flood damage being reclassified as storm surge damage. I had never heard of storm surge damage before Katrina.

    Reply
  4. Brendan says

    September 7, 2017 at 9:36 pm

    As a commercial insurance broker I speak daily on these issues with clients though in the context of commercial operations rather than personal. As an ounce of prevention is worth a pound of cure, I would note that the largest claim cost of a seismic event isn’t the earthquake itself but the fires that follow.

    A seismic gas shutoff valve is an affordable mitigation device particularly in the context of earthquake premium. While it doesn’t prevent the quake it does cut off the gas line(s) when a seismic event occurs which may substantially mitigate the claim cost.

    Sam, if you’re ever interested in modeling your properties for catastrophic events just to see what the probable maximum losses look like over various time periods, I think that would be a good exercise for you to share with your readers and I would be happy to facilitate.

    Reply
    • Financial Samurai says

      September 7, 2017 at 10:15 pm

      Good tip on the seismic gas shutoff valve and highlighting that it’s really the fires that ensue that cause the most damage.

      I think I do have seismic gas shutoff valves on all my properties, but I will double check anyway.

      Also, how quickly does earthquake insurance go into effect after you call and agree to pay? It looks like flood insurance takes 30 days to go into effect after you sign the docs. Thx

      Reply
      • Brendan says

        September 8, 2017 at 11:37 am

        There’s no waiting period for earthquake like there is for flood. However, most carriers put a moratorium on binding coverage post-earthquake for various periods due to the likelihood of aftershock.

        Moratoriums are the most common mechanism used by insurance carriers to protect themselves. If for some reason you’re in Florida right now and are looking to cover wind, I’m willing to bet big dollars that there’s a moratorium on new wind exposures.

        Not trying to get into semantics but I noticed you mentioned calling and agreeing to pay. I ALWAYS recommend that when you are looking to bind coverage you do so via an email and then follow up with a phone call. Having the request for coverage in writing can save a lot of unnecessary questions should a claim arise – particularly a claim due to a catastrophic event.

        Reply
        • Financial Samurai says

          September 8, 2017 at 12:27 pm

          Good tips. Do you have any really egregious stories where an insurance company didn’t pay out a claim even though the client should have been paid out?

          Reply
          • Brendan says

            September 8, 2017 at 1:36 pm

            I can’t think of anything truly egregious on the property and casualty side but often hear of health insurance carriers doing egregious things for not properly having some piece of paperwork. I have many clients that feel they should have been paid out (I often get clients when their previous broker wasn’t outlining coverage correctly) but the reality I find is that when an insurance company doesn’t pay out it’s because the broker didn’t properly advise the client of the terms of the policy.

            One example of that which comes to mind is terrorism coverage which is most commonly procured through TRIA, a federal backstop for terrorism claims. Many individuals were surprised after the Boston bombing that TRIA didn’t apply as it was never certified by the Secretary of the Treasury. While that precluded TRIA from applying, the failure to certify the event as an act of terrorism ended up helping out those who didn’t have terrorism coverage as a certified act of terrorism is an exclusion on many policies.

            For commercial clients I see a failure to understand how to properly calculate the cost of a business interruption as being a serious bone of contention following a major loss (e.g. earthquake hits San Francisco and your factory can’t get widgets for three months yet owner wants to keep employees on payroll, etc…) and data breaches being two areas where insurance company denials or limits on coverage cause heartburn for policy holders.

            Reply
  5. Personal Alpha Investments says

    September 7, 2017 at 6:39 pm

    Great article!

    Out here in Canada, I am careful about getting myself insured for flooding. Although, I don’t own any real estate, this is something that is always at the back of my mind. Finding a good insurance provider who’ll honour its end of the bargain is equally important!

    On another note, I absolutely abhor people instilling fear in you and or showing you down, just because you have something they don’t. They feel better about themselves while “cautioning” you. Its their attempt to one-up you!

    Cheers,
    PAI

    Reply
  6. Kevin says

    September 7, 2017 at 12:38 pm

    Great article. I live in Wisconsin and live in an area that is pretty “hilly” so we don’t have to worry to much about tornados or any other major disaster – standard home owners insurance coverage. Our biggest threat is getting snowed in for a while in the winter or subzero temps.

    Reply
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