By its very definition, insurance is meant to prevent loss in the event of a catastrophic event. However, while the loss of a home, perhaps by fire, is considered a catastrophe on a personal level, catastrophes on a regional scale also exist.
Disasters such as Hurricane Katrina, the Tohoku earthquake and tsunami in eastern Japan, and the 9/11 terrorist attack are all considered low-probability, high-cost events that are usually excluded from standard insurance policies. Homeowners who wish to be covered for catastrophic events may have to purchase additional hazard or catastrophe insurance.
These so-called low-probability events – earthquake, tropical cyclone, flood and drought – affected 75 percent of the world’s population between 1980 and 2000, according to a report released by the United Nations Development Programme (Reducing Disaster Risk UNDP report, 2005).
Many homeowners who purchase a broad, comprehensive type of insurance will add hazard insurance for specific dangers if they live in catastrophe-prone areas. Hazard insurance policies provide coverage for natural disasters, including fire, wind and earthquakes. For instance, those who live in flood plains may buy hazard insurance for water damage, while homeowners along fault lines may add earthquake insurance.
Protecting against catastrophes can be costly. For a house in a flood-prone area, a flood insurance policy may cost $400 a year or more, almost doubling the rate of some standard policies. The Federal Emergency Management Agency and the National Flood Insurance Program provide information on flood insurance at www.floodsmart.gov.
A separate earthquake policy is available from most insurance companies. The cost of the coverage will depend on the likelihood of earthquakes in the homeowner’s area. In California, the California Earthquake Authority (www. earthquakeauthority.com) provides this coverage.
Not all government plans offer the best rates. A homeowner who lives in a high-risk area and is offered insurance through a government plan should also contact the state insurance division for a list of private insurers who may offer the same type of insurance at a lower rate.
Before making the decision to purchase hazard or catastrophe insurance, it’s important to weigh the additional expense of coverage against the likelihood of, and costs to recover from, a catastrophic event.