Catastrophe insurance: What it is and who needs it

Standard home insurance policies cover losses caused by many common risks, but they often exclude certain types of catastrophic disasters, such as floods or earthquakes. To have coverage for these types of events, you’ll need catastrophe insurance. Coverage for catastrophes may require purchasing a separate standalone policy or adding an endorsement to your existing home insurance. 

What is catastrophe insurance?

Catastrophe insurance for homeowners covers specific risks (called perils) that are usually excluded from standard home insurance policies, like floods, earthquakes, and hurricanes.

Because these major storms or disasters can strike and cause devastating damage to an entire community, they present a huge problem for an insurance company if it receives a massive number of claims after a significant event. This is why standard homeowners insurance usually doesn't include coverage for major catastrophes, and you typically need to buy that protection separately.

Perils not covered by a standard home insurance policy

Standard home insurance does not cover damage from certain risks. Exclusions may vary depending on which insurer you choose and where you live, but here are some of the most common: 

• Flooding from storms, hurricanes, and sump pump overflow

• Earthquakes

• Mudslides

• Sinkholes

• Ground movement from old mines

Who needs catastrophe insurance?

While it’s not required by law, catastrophe insurance is available for homeowners who want more coverage than a basic policy offers. You can purchase endorsements (optional add-on coverage) or separate policies for risks specific to your area. For example, you may want to consider earthquake coverage if you live in California.

Notably, floods are among the most common and expensive natural disasters in the U.S. In fact, flood insurance claim payouts average about $68,000, according to data from Floodsmart.gov. If you live in a high-risk flood zone, your mortgage company will likely require you to have flood insurance. 

However, hundreds of flood events happen outside high-risk flood zones every year. So, even if it's not required by your lender, insurance experts recommend carrying flood insurance if you can afford it.

Finally, damage resulting from hurricanes can leave certain homeowners vulnerable. While wind and wind-driven rain losses may be covered by a standard policy, in high-risk coastal regions, insurers might exclude wind damage. In this case, you’d need to buy a separate windstorm policy. Hurricane-related flooding also won’t be covered for homeowners who don’t have flood insurance.

What does catastrophe insurance cover?

There is no catch-all catastrophe insurance that covers every type of disaster not covered by your home insurance. You will need to buy a separate policy or add an endorsement to your home insurance for every type of catastrophe you want covered. 

Common types of catastrophe insurance include: 

• Flood insurance: To get protection from flooding caused by rising waters, storm surges, tsunamis, and more, you need flood insurance.

• Earthquake insurance: For financial protection against earthquake-related losses and damage from seismic activity, you need earthquake insurance. 

• Windstorm insurance: Many home insurance policies include coverage for windstorms, but that may not be the case if you live in a high-risk area for hurricanes or other types of storms. You would need to purchase a standalone windstorm insurance policy or add an endorsement to your existing policy. 

• Sinkhole insurance: Most home insurance policies will not cover sinkholes, except in states like Florida, where insurers are required to include catastrophic ground cover collapse (CGCC). Even then, CGCC coverage only applies in extremely specific scenarios. Sinkhole loss coverage is an optional add-on that can help pay for repairing structural damage to your home and stabilizing your land after a sinkhole occurs. 

What does catastrophe insurance not cover?

Catastrophe insurance only covers losses caused by the specific perils it was created to cover. For example, flood insurance covers flooding in your home caused by rising waters outside of your home. Earthquake insurance covers damage to your home caused by earthquakes and seismic activity, and so on. Catastrophe insurance does not cover other types of risks that your standard home insurance policy covers, including:

• Fire and lightning: Standard home insurance policies generally cover losses caused by fire and lightning. 

• Weather events: Most types of weather and storms are covered by your standard home insurance, unless you live in an area where windstorm damage is excluded. 

• Theft or vandalism: Intentional damage caused to your home by people who aren’t listed on the policy should be handled by your regular home insurance. 

• Personal property: Some types of catastrophe insurance may not cover the personal belongings inside your home. For example, flood insurance might not cover personal property unless you purchase separate contents coverage. 

• Liability: Catastrophe insurance does not cover your liability, including medical and legal costs, when you are at fault for someone else’s injury or property damage. 

• Medical payments: Catastrophe insurance does not cover medical payments for visitors who get injured on your property. 

Additional coverages to consider

It’s important to make sure you have sufficient coverage since your home is likely one of the most significant purchases you’ll ever make. Explore these optional coverage options to bridge potential gaps in your standard home insurance policy: 

• Water backup coverage: This optional add-on can help cover losses when your property is damaged by water backing up into your home, overflowing from a sump pump, or other malfunctioning equipment. 

• Ordinance or law coverage: This type of coverage helps pay for additional repairs that may be necessary after a loss to bring your home into compliance with local ordinances and building codes. 

• Business insurance: If you have a home business, a standard home insurance policy may not cover related losses (or only offer limited coverage). Business insurance can help make sure your work-related property is protected. 

Frequently asked questions

How do I protect my home from catastrophes?

Catastrophe insurance can help protect your home from losses caused by certain types of disasters. But whether you have catastrophe coverage or not, you can reduce your home’s risk by putting some defensive measures in place:

• If you live in an area at risk for earthquakes, get your foundation inspected and shore up your home against seismic activity by reinforcing the foundation and walls. 

• If you live in an area at risk for hurricanes, make sure your home is ready for high winds. Maintain your roof, install hurricane shutters, and secure loose items in your yard. 

• Find out if you live in a floodplain that is at high risk for rising waters. Flood mitigation activities may include raising your home above flood level, moving appliances to higher floors, and installing backflow or gate valves.  

Who declares an insurance catastrophe?

When it comes to home insurance, a catastrophe is a severe event that affects many policyholders and insurance carriers simultaneously. The insurance industry designates events that lead to total losses of $25 million or more as catastrophes. 

What is the difference between catastrophe and hazard insurance?

Hazard insurance refers to the part of your standard home insurance policy that covers your home's structure. Catastrophe insurance may provide coverage for both your home and other belongings, as long as the catastrophe meets the standard for coverage as outlined in the policy.