What is catastrophe insurance?
Catastrophe insurance, sometimes called catastrophe coverage or disaster insurance, is a type of insurance designed to protect your property against losses caused by low-probability, high-cost events. Typically, this coverage is for weather-related perils, such as:
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Floods.
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Earthquakes.
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Hurricanes.
You can buy catastrophe coverage as a standalone policy, but some providers offer coverage for specific perils you can add as endorsements to your home insurance.
What catastrophe coverage isn’t
People sometimes confuse catastrophe insurance for other coverages. The most common one is probably catastrophic insurance. It’s an easy mistake to make, but catastrophic insurance is actually a type of health insurance that comes with a high deductible but a low monthly premium. It covers insureds when they experience a catastrophic health event (as opposed to covering regular doctor’s visits, prescriptions, and other routine events).
Homeowners have also confused catastrophe coverage with their hazard insurance. However, hazard insurance refers to the portion of your homeowner's policy that covers the structure of your home. The term is most often used by mortgage lenders who typically want you to have hazard insurance before they offer you a loan.
Lastly, you might also hear about personal catastrophe coverage. Sometimes called personal umbrella insurance, personal catastrophe coverage is an extra layer of protection you can add to your current home, boat, or auto policies to provide extra protection in case of a catastrophic event.
Are you at risk for a catastrophe?
Let’s start by defining catastrophe. In the insurance world, a catastrophe is a natural or human-created disaster that impacts many policyholders and providers at the same time. When this happends, experts typically expect catastrophe claims to reach a specific dollar amount.
Catastrophes may not happen very often, but they cause considerable damage when they do. As a result, standard home insurance policies may exclude coverage for these catastrophes:
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Earthquakes
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Tsunamis
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Volcanos
That coverage gap may be bad news if you live near:
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A floodplain.
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The coast.
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A wildfire zone.
Your geography can increase your risk of facing a catastrophe. And that means you could find yourself without coverage at the moment you need it most.
But you don’t have to move or risk losing your home when disaster strikes. Many insurance providers offer catastrophe insurance, either as standalone policies or endorsements you can add to your home insurance. You can even buy catastrophe coverage for the peril you are most likely to face in your area.
For instance, floods are a bigger problem than most homeowners realize. The Federal Emergency Management Agency estimates that just an inch of water can cause $25,000 in damage to a home. The increasing likelihood of floods and the cost of flood loss make flood insurance a smart move for most homeowners.
Even if you think your home is in the clear, your mortgage lender may not. It may require catastrophe insurance to protect its investment.
How much does catastrophic coverage cost?
Costs for catastrophe insurance vary by insurer and area. In general, the greater the risk, the higher the cost. Take Florida, for example. Areas along the coast have a high risk for hurricanes, floods, wildfires, and earth movement, so the cost is probably higher than a landlocked area in the Midwest.
Certain locations may also have to deal with special deductibles, like Texas’s designated catastrophe area. Hurricane risk is high for the 14 counties in this area, and that can make it difficult for homeowners to get home insurance. Moreover, coverage in this area likely has a hurricane deductible on top of the standard flat deductible. Depending on where your home is, a hurricane deductible can be as much as 10% of your home’s insured value.
To keep costs down:
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Shop around. Different insurance providers may offer better rates. Get quotes from a few companies before you decide.
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Look for other discounts. Ask your agents about discounts on your home insurance. You may see lower premiums for security systems, fire alarms, smoke detectors, and wind mitigation.
Protecting your home from catastrophes
Whether you have catastrophe insurance or not, it’s important to take steps to protect your home from low-probability events, especially if you have a warning that they may be coming. Here are some examples:
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If you live in an earthquake-prone area like California, be sure to have your foundation inspected and take any steps to shore up your home against earth movement or other geological forces.
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If you live in the southeast, take steps to prepare your house for any coming hurricanes. Steel your house against the coming wind and rain that could result in serious damage. While your at it, keep an eye on hurricane updates when they happen.
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Take time to study local flood maps and be ready with a flood plan in case of heavy rains. Flood risks can be serious, so understand your local risks and know what you can do to reduce the risk of damage to your property.
- Wherever you are, put together a disaster preparedness plan with your family and review your home insurance so you know which disasters are covered.
Not sure if your home needs catastrophe coverage? Talk to your insurance agent to get help evaluating your risk and picking the appropriate coverage.
