Two recurrent issues are keeping policyholders from full recovery following disasters.  First, policyholders are not getting flood insurance even though it is available.  Second, policyholders are not increasing the limits of coverage to reflect the full costs of construction or replacement. They are exposed to the risk of being significantly under-insured.


In Iowa, the story noted:      

A combination of costs and confusion keeps many Iowans from buying federal flood insurance.

Only about 1 percent of Iowans owned flood insurance when last month’s record flooding struck. More than 4,000 homes in Cedar Rapids were damaged or destroyed, but only 777 homes in Linn county were protected against flooding. After the floods of 1993, the National Flood Insurance Program spent $20 million in a marketing campaign that urged homeowners to buy flood insurance. Nonetheless, few people carry the coverage.


 If you are anywhere close to a river, damn, levy, or any type of body of water, you can most likely qualify for flood insurance.  Even if you are not in a flood zone, if your community participates in the National Flood Program, you can buy flood insurance.  State Farm reported that in one Iowa town, it insured over two thousand structures but that only a dozen carried flood insurance.  I am certain people are simply being foolish or are confused about the need for such insurance. So, let me once again explain two important principles of Merlin On Insurance: The chance of a disaster or catastrophe striking you or a loved one is significantly decreased by simply purchasing insurance against the risk. The chance of a disaster or catastrophe striking you or a loved one is inversely proportional to the amount of insurance you purchase.


So, if you want to live a long life, buy as much life insurance as you can. If you want to avoid a flood, buy flood insurance.  The more you buy, the better the chance that you will never collect a penny. The second problem is that policyholders are simply not buying high enough limits.  Construction costs for repair are far greater than brand new construction.  Many agents, insurance companies, and policyholders mistakenly believe that proper policy limits should be new construction prices. 


Instead, the analysis should be the cost to repair and rebuild. Construction costs for rebuilding and repair are typically twenty to fifty percent higher than new construction.  Most people unintentionally have their homes and businesses under-insured.  A story in last month’s Los Angeles Times, Wildfires heat up debate on inadequate insurance coverage,underscored the severity of this problem. It noted that Amy Bach, the executive Director of United Policyholders, commissioned a study regarding this problem and of policyholders getting paid. Of the 274 victims of last fall’s Southern California fires who took part in a study about their losses, "three-quarters of respondents complained that they didn’t have enough insurance to pay their rebuilding costs."Whoa!! Seventy five percent!! There is a major underwriting problem.


The problem is one for the insurance industry because insurance carriers want to collect the full value of premiums for the risk—insurers do not want to under-insure either. Most losses are less than total losses, and the insurance industry makes more money by insuring to the full value of replacement cost, and the customer is properly insured when that happens. It does not mean the claims department is going to pay, but at least there exists a chance of full indemnity when the risk is properly insured replacement.