Natural Disasters: Coverage, Records and Recovery

Floods, wildfires, hurricanes, tornadoes and earthquakes do two kinds of financial damage. The first is the loss itself. The second, often larger, comes from the gaps: a homeowners policy that never covered flood, a deductible measured in percent rather than dollars, months in a rental while the claim drags on, and receipts and records that burned with the house. This chapter covers what to check before a disaster, what to keep ready, and how to handle the money afterwards.

What your homeowners policy leaves out

A standard homeowners policy covers fire, wind, hail and many other perils, but its exclusions are where disaster losses concentrate.

• Flood is excluded. Rising water from rain, rivers, storm surge or overflowing drainage is not covered by homeowners or renters policies. It needs a separate flood policy (next section).
• Earthquake and earth movement are excluded. Earthquake cover is a separate policy or endorsement, often with a deductible set as a percentage of the dwelling limit, ranging from a few percent up to a quarter of it.
• Wind and named-storm deductibles. In many coastal states the deductible for hurricane or wind damage is a percentage of your dwelling limit, commonly a few percent, rather than the flat deductible on the rest of the policy. On a house insured for several hundred thousand dollars, a small-looking percentage becomes a large bill. Find this line on your declarations page.
• Sewer and drain backup is often excluded unless you add an endorsement.
• Additional living expenses (sometimes called loss of use) pay for a rental, hotel and extra costs while the house is unlivable, but they carry a limit, often a percentage of the dwelling limit or a time period. Major rebuilds can outlast it.
• Rebuild cost. After a regional disaster, construction costs jump because every house needs work at once. Chapter 1 covers extended replacement cost and ordinance or law coverage, which help close that gap.

Flood insurance

Most flood insurance in the US is written through the National Flood Insurance Program, run by FEMA and sold through ordinary insurance agents. For a one-to-four family home it pays up to $250,000 for the building and $100,000 for contents. Three features catch people out:

• There is usually a 30-day waiting period before a new policy takes effect, so it cannot be bought as a storm approaches. (Some exceptions apply, such as a policy bought when a mortgage is taken out.)
• Contents are paid at actual cash value, meaning depreciated value, not replacement cost, and basement contents are covered only in a limited way.
• The program's authority must be renewed by Congress from time to time; when it lapses, new policies cannot be sold until it is restored, though existing policies keep paying claims.

Private flood insurers also write policies, sometimes with higher limits, replacement-cost contents or living-expense cover, and excess flood policies can sit above an NFIP policy for homes worth more than its limits. Your risk is not only a question of whether you are inside a mapped high-risk zone: a large share of flood claims come from outside those zones. You can look up your address on FEMA's Flood Map Service Center.

Cash, access and a disaster reserve

In the first days after a disaster, power, card networks and bank branches may be down, and insurance money takes time. The reserve has to carry you until claims pay.

A household with $15,000 set aside and $4,500 of essential monthly costs has 3.3 months of cover. After a disaster that reserve has to pay the deductibles first (including any percentage wind or earthquake deductible), then bridge living costs until additional living expense payments and claim checks arrive. If your deductibles are large, the reserve needs to be larger than the usual job-loss cushion. The emergency fund calculator helps size it.

Practical steps that help:

• Keep some cash at home in small bills, enough for a few days of fuel, food and supplies when card readers are down.
• Hold accounts at more than one institution, and make sure you can reach them through an app as well as a branch.
• Keep a credit card with available room as a short-term bridge, not as the plan.

Records and proof, before you need them

Claims are paid on proof, and proof is the first thing a fire or flood destroys.

• Home inventory. Walk through every room recording a video, opening closets and drawers, and narrating what things are and roughly when you bought them. Photograph serial numbers and receipts for expensive items. Update it once a year. Store it off-site.
• Documents. Keep scans of identity documents, insurance policies and declarations pages, deeds and titles, recent tax returns, and account and policy numbers in encrypted cloud storage. Keep originals of irreplaceable papers in a waterproof, fire-resistant container or off-site.
• Contacts. Write down your insurer's claims line, your agent, your bank and your mortgage servicer somewhere you can reach without your home.

After the disaster: claims and recovery

1. Report the claim quickly to every insurer involved: homeowners, flood, car. Ask what documentation they need and whether they offer an advance on additional living expenses.
2. Prevent further damage where it is safe to do so, such as tarping a roof or removing water, and keep receipts. Policies generally expect reasonable steps to limit damage.
3. Document everything before cleanup: photos and video of each room and damaged item. Do not throw away damaged property until the adjuster has seen it or you have recorded it.
4. Track every cost of displacement: hotel, meals above your normal spending, mileage, storage. These are what additional living expense cover reimburses.
5. Be careful with contractors. Disasters attract unlicensed contractors who ask for large upfront payments. Check licences, get written estimates, avoid paying in full in advance, and read any assignment of benefits form carefully before signing, since it hands control of your claim to the contractor.
6. Consider a public adjuster for a large or disputed claim. They represent you, not the insurer, and are paid a percentage of the settlement, which some states cap.

Federal help. When the President declares a major disaster that includes individual assistance, FEMA can provide grants for basic needs not covered by insurance. These are meant to make a home safe and livable, not to replace everything lost, and you apply at DisasterAssistance.gov after filing your insurance claims. The Small Business Administration also lends to homeowners and renters after declared disasters, at fixed rates with long terms.

A gap of $60,000 between the insurance settlement and the rebuild, borrowed at 3.0% over 30 years, costs $253 a month and $31,066 in interest over the life of the loan. The rate in this example is for illustration; SBA sets its disaster loan rates by law for each disaster, so check the current terms. Insurance that closes the gap in advance avoids this cost entirely.

Tax relief. The IRS usually postpones filing and payment deadlines for taxpayers in federally declared disaster areas. Uninsured losses may be deductible as a casualty loss, but for personal property that deduction is generally limited to losses from federally declared disasters, and Congress has adjusted the rule in recent years; IRS Publication 547 has the current version.