Lack of home insurance can turn disaster into financial nightmare

2011 has seen more than its share of natural disasters, ranging from record-breaking tornado outbreaks to floods and wildfires. While catastrophic events disrupt the lives of everyone in their path, people without home insurance, renter’s insurance or the proper disaster coverage also must deal with debilitating financial consequences.

Unlike auto insurance, which is required by law, home insurance is not a mandatory purchase for many Americans. If you have a mortgage, your lender likely will require that you buy home insurance, but if your home is paid off, home insurance is an optional expense.

Many Americans’ homes aren’t insured for damage from disasters such as a tornado.

Some homeowners choose to get rid of their home insurance when times get tough. According to a 2009 study by the Insurance Research Council, 5 percent of homeowners reported canceling their policies as a result of the economic downturn. Others inadvertently let their policies lapse, says Ronald Reitz, a board member of the National Association of Public Insurance Adjusters. Reitz works with consumers to prepare and file insurance claims as president of Quality Claims Management.

“We often see homeowners who find that their policy was canceled two days or a week prior to this huge disaster,” Reitz says.

Renters disregard insurance

Homeowners aren’t the only ones often left dealing with the consequences of a disaster without insurance.

“Far too many renters just don’t buy rental insurance,” says Jeanne Salvatore, senior vice president of the Insurance Information Institute. Many renters think they have nothing to worry about since they don’t own the property, but if their apartments or rented homes are destroyed, their belongings usually are as well.

That’s what happened to Spencer Belkofer, an interactive marketing consultant in Alabama. “A few years ago I was renting a home which burnt to the ground,” he says. “I did not have renter’s insurance and lost everything I owned.”

Do you need flood insurance?

Not only can homeowners and renters be hurt by not having property insurance, but they can be caught off-guard without flood insurance as well. “Ninety percent of all natural disasters have some form of flooding, so the risk is very high,” Salvatore says.

A standard homeowner’s or renter’s insurance policy won’t cover flooding, even if it’s connected to another type of disaster. For example, if there’s a hurricane, a standard policy would cover wind damage, but flooding that resulted from the hurricane would be covered by a separate flood insurance policy.

While every American doesn’t need to buy flood insurance, “more people need it than have purchased it,” Salvatore says. Many renters don’t realize that they can benefit from flood insurance as well, since it not only covers damage to a building’s structure, but it also covers belongings that are damaged in a flood. You can find out whether your region is at a low, moderate or high risk of flood damage by visiting FloodSmart.gov.

Considering the costs

A standard homeowner’s or renter’s insurance policy won’t cover flooding, even if it’s connected to another type of disaster.

So, how much can a lack of insurance cost you? A 1,000-square-foot home with only 2 inches of flooding could sustain more than $10,000 in losses when you consider the costs of cleaning, repairs and lost personal items, according to the National Flood Insurance Program, created by Congress to offer flood insurance.

It typically costs more to rebuild a home than it does to construct one from scratch. One reason is because there may be demolition costs involved. Also, contractors must rebuild from the top down, which is a more time-consuming process than building from the ground up, according to building cost data provider Marshall & Swift/Boeckh.

Costs are likely to rise even higher after a natural disaster since so many people will be needing to rebuild at the same time, Reitz says. “As that demand goes up, so does the price and cost of the materials and the labor,” he says.

To find out how much a disaster would set you back:

1. Check with a local homebuilders association, surveyor or reputable builder to find out how much it would cost to rebuild your home.

2. Create an inventory of your possessions to get an idea of how much you’d have to spend to replace all of your belongings.

3. Add these two costs together to determine how much you should set aside if you decide to skip home, renter’s or flood insurance.

Should you ’skimp’ on insurance?

While other types of disaster coverage such as earthquake insurance may come into play for some people depending upon where they live, “everyone should have a homeowner’s policy or renter’s insurance policy to protect their home, and most people should have flood insurance,” Salvatore says.

An insurance agent can tell you about other types of risks that might affect your region.

“Insurance is an area that people seem to skimp on,” Reitz says. “But do you really want to skimp on insurance when it comes to protecting your home and your possessions?”

–Tamara E. Holmes