Another hurricane seasonwill officially begin June 1.And like the past several years, unusually high activity isexpected. Colorado State University researchers report there isa 64% chance that at least one major Category 3, 4, or 5 hurricanewill make landfall on the US coast this coming season.So how can you best protect your home? Purchasing a floodinsurance policy is one place to start.
In a post-Katrina world, many now realize that flood damage,one of the major elements of a hurricane, is not coveredunder homeowners insurance. Separate flood insurance, availablefrom the National Flood Insurance Program (NFIP) managedby the Federal Emergency Management Agency, must bepurchased on its own through a local insurance agent. Whilesuch coverage is often mandatory in high-risk areas for mortgagepurposes, those in low-risk areas often don't see the needfor a policy. Yet with increased hurricane risks, as well aspotential NFIP changes on the way, just about everyone maywant to give flood insurance a second look this year.
The Hurricane Outlook
A late El NiÃ±o (Pacific warming) reportedly contributed tolast year's lower-than-predicted volatility, but the possibleentrance of a La NiÃ±a (Pacific cooling), announced in lateFebruary, could stir things up this yearâ€”particularly wherehurricanes hit. "There tends to be a greater-than-normal numberof Atlantic hurricanes and fewer-than-normal number ofeastern Pacific hurricanes during La NiÃ±a events," says retiredNavy Vice Adm. Conrad C. Lautenbacher, PhD, under secretaryof commerce for oceans and atmosphere and NationalOceanic and Atmospheric Administration administrator.
Indeed, many now feel the coastal Northeast, which is generallyseen as lower risk compared with states like Florida andLouisiana, is statistically "due" for a major storm. As a result,Allstate and State Farm are no longer writing new homeownerspolicies in many areas along the East Coast including partsof New York, New Jersey, Delaware, Maryland, Virginia, andothers. In New Jersey, where Allstate stopped writing newhomeowners policies this past February, spokeswoman SheilaBreeding cited "a decades-long period of increases in the severityand frequency of hurricanes"(Reuters). JeffWilliams, regional counsel for Allstate in Maryland, echoedthe sentiment, saying that chances of a hurricane strikingBaltimore in the next 5 years have increased by as much as30%. He told the , "We cannot ignore what thescientists are telling us. We are looking forward to a lot morehurricanes and a lot bigger hurricanes."
Rate Changes Ahead?
"Certainly Katrina was a big wake-up call," commentsButch Kinerney, NFIP liaison. On the positive end, the numberof flood insurance policies has grown 14% since that time. Yetthe NFIP now carries $17 billion in debt from the storm. Twobills last year, one in the Senate and one in the House, centeredon NFIP "reform and modernization." Kinerney says whatthese bills may eventually mean to flood insurance rates is stillto be determined. "Congress has said they're going to movefairly swiftly," he comments, but adds, "We're not sure whatthe end result is going to look like."
Kinerney does, however, feel vacation homes may be particularlyvulnerable to potential congressional policy changes.Specifically, any rate discounts for second homes may be eliminatedin the next few years. "Right now, you can still buy second-home insurance at a potentially lower rate," he says. As aresult, "Now is the time to get flood insurance" for suchhomes, he recommends.
Currently, the price of a flood insurance policy depends onwhere a property is located on the Flood Insurance Rate Map(www.msc.fema.gov). "What they look for is elevation," saysBrendan Shaw, an insurance agent with Red Bank, NJ-basedYork-Jersey Underwriters. In high-risk areas, costs generallyfall between $750 and $1500, Shaw says. Although he cautionsthat he has seen one policy in Monmouth Beach, NJ, runas high as $7500.
Those in low-to moderate-risk areasâ€”20% to 25% of allclaims are filed in these areas (indicated by a B, C, or X zone)â€”can purchase preferred risk policies (PRPs) starting at just $112per year. Although Kinerney cautions, "Your doctors don'twant a $112 policy."
There is the option to purchase buildingcoverage, contents coverage, orboth. Building policies start at $20,000and go up to $250,000. Contents coveragestarts at $8000 and goes up to$100,000. Replacement cost coverage isalso available for a single-family residence."If a doctor owns an investmentproperty, he or she can just insure thebuilding," Kinerney says. "But for a primaryhome you'll want building andcontents."
An important note:
Kinerney points out that buildingcoverage is just for the actual bricks andmortar of the structure. The land ortotal property value is not insured. Yetpeople may still find themselves wantingadditional protection. According toKinerney, Firemans, Chubb, AIG, andLloyds "all offer excess flood insurance." Regularflood insurance rates are determined bythe NFIP, so policyholders don't need toshop aroundâ€”any agent will offer thesame coverage at the same price. Excessflood insurance is available outside ofthe NFIP and rates may vary from companyto company.
Shaw offers some other recommendationswhen purchasing flood insurance.First, each town that is an NFIPparticipant has what's called a "firmdate." If a resident's home was builtbefore the firm date, they can be grandfatheredin to a different flood insurancerateâ€”sometimes more, sometimes less.Additionally, homes built after the firmdate must receive a flood elevation certificate.While this certificate can cost$200 to $300, Shaw says, most peopledon't know that it can be transferredfrom the home's previous owner at nocharge if you think to ask before theclosing. Additionally, if you choose toget the certificate even when it's notrequired, it can sometimes save youmoney on your rate. (To determine yourtown's firm date, visit www.fema.gov/business/nfip/cbrs/cnj.shtm andclick on your municipality.)
You may also qualify for up to a45% discount of your annual floodinsurance premium based on yourtown's community rating system (CRS),according to the NFIP. The CRS is avoluntary program that measures atown's flood preparedness, based from1 to 10. Class 1 municipalities receivethe highest rate deductions, while Class10s receive no deductions. (It should benoted that PRPs and Mortgage PortfolioProtection Program policies arenot eligible for CRS discounts.)
Fortunately, there's still time to purchaseflood insurance and have it ineffect before the middle of hurricaneseasonâ€”if you act now. Any new floodinsurance policy has a 30-day waitperiod before it is activated (unless it isbeing purchased as required by a mortgagecompany for a new home). Inother words, if a policy is written onJune 1, it won't provide protectionuntil June 30. The same is true for anypolicy changes and is meant to deterthose who would make last-minutepurchases or adjustments because theyhear a storm is headed toward thecoast.
For a wealth of information, visitwww.floodsmart.gov. Click on "What'sYour Flood Risk?" to access floodmaps, view local agents, and estimateyour premium. Or call the NFIP at 888-FLOOD29.