Dealing with the Financial Aftermath of a Natural Disaster

Angela Colley — Ask an Insider

Hurricanes Harvey and Irma caused an estimated $150 to $200 billion in damages in Texas, Florida, and Georgia. Many residents in Puerto Rico, which weathered catastrophic losses during Hurricane Maria, are still foraging for food and clean drinking water and some continue to live without electricity. And in California, wildfires have already resulted in an estimated $1.4 billion in property damage—and that’s just the last two months.

If you live in an area prone to natural disasters (and with climate change, fewer and fewer spots seem safe), surviving the crisis is only the start of the battle. Then comes insurance claims and denials. For many homeowners, surprising caps to their insurance coverage, Federal Emergency Management Agency (FEMA) delays, and spikes in construction costs can turn an already terrifying event into weeks or months of frustration.

You can’t totally predict where or when a natural disaster will hit, but you can take steps now to make sure you steer clear of avoidable, insurance-related headaches later. We spoke with Thomas Richards, an insurance expert with Planners Insurance Group in Fort Worth, Texas, about the common issues homeowners face in disaster-prone areas.

Make Change: If your home is involved in a natural disaster, what is the first step you should take, insurance-wise?

Richards: First and foremost, be safe. There could be live electrical lines damaged or your building could be at risk for collapse or contaminated with sewage. It’s best to leave and not return until authorities deem it safe. Then take pictures before you remove any water or make any repairs, otherwise, you could decrease the extent of your coverage. Then call your insurance company’s claims department for further instructions.

When you’re looking for homeowner’s insurance, what should you be wary of?

Normally different policies will have something that isn’t going to be advantageous to the homeowner in areas prone to disasters. That can vary from higher deductibles to complete exclusion of a normal coverage. [For example: a policy may exclude wind damage from coverage in a hurricane-prone area.]

What wouldn’t a typical policy cover?

Flooding for one. According to FEMA guidelines, [under the most common policy, Homeowners Form 3] two or more acres of normally dry land area or two or more properties must be completely inundated for coverage to apply. Earth movement: Damages can range from foundation issues, sinkholes, or separating of exterior and interior walls. And mold. Even if your policy says you have mold coverage, chances are slow-growing mold [typical after a flood] will not be covered. Mold is typically only covered if caused by a covered claim.

When should you opt for—and when are you required to obtain—additional policies, like for flooding?

Flood insurance is not required by law. However, your mortgage lender may require you to have a flood policy to obtain financing if you live in a flood-prone area. But flooding is the most common natural disaster in the world and can happen anywhere. If you can afford a flood policy, purchase one.

What about other disaster zones, do you need additional coverage for certain kinds of disasters?

Some insurers will offer opportunities to purchase earthquake policies or you can normally purchase a standalone earthquake policy. Make sure to compare the deductible requirements and different insurers’ definition of an earthquake. An insurer may require an earthquake to surpass a certain threshold on the Richter scale for coverage to apply, which would basically exclude smaller earth tremors, [such as those] caused by fracking.

Should you be wary when trying to buy a home during, say, hurricane season or wildfire season?

The season itself will not affect the ability to purchase a policy and ultimately close on a home. Insurers will almost always place a binding restriction [period when new insurance policies cannot be written] during an actual event such as a wildfire, hurricane, or tornado, which can cause a delay in closing on a mortgage.

I dealt with that myself when buying a home in a hurricane zone recently. A binding restriction was put in place and couldn’t be lifted while there was a named hurricane in the area. Is this common in other areas (or with other disasters) as well? And how long do these holds typically last?

This is common of any natural disaster anywhere in the country. The length of the binding restriction will depend on the severity and type of event. The more severe the event, the longer the restriction. For instance, flooding does not end when the storm that caused the floods pass. A tornado may pass and cause minimal damage to an area, so the hold may be shorter.

Are there any other delays before a policy can go into effect?

Flood policies cannot be placed in force [put into effect] until 30 days after payment unless required by a mortgagee to close on a loan. This is to prevent insureds from only buying policies when there’s a storm coming, otherwise, no one would buy a policy until a potential disaster hit and there would be no surplus to pay claims. Other types of policies can go into effect immediately as long as there are no binding restrictions and the insurer does not first require an inspection in order to place the policy in force.

Can homeowners expect any delays or potential problems after a large-scale disaster like the recent wildfires or hurricanes?

There are almost always delays after a large-scale natural disaster. Supply is rarely able to keep up with demand after a catastrophic event. There are not enough contractors to complete repairs and materials are always out of stock due to the rampant demand.

Anything homeowners can do to make the process go smoother?

Again, take a lot of pictures before doing any repairs or clean up. Also, every homeowner should inventory and catalog their belongings periodically in some type of cloud-based storage system. After a disaster hits, most people only think of big-ticket items such as TVs and refrigerators because they are still in shock. People who catalog their belongings generally get much higher claims payouts for their personal effects.

This interview has been edited and condensed.