Avoid Disaster: Get the Right Catastrophe Insurance
By: Brian Boucher
The year 2020 was like none other in living memory. A record number of named Atlantic storms. Unprecedented wildfires from California to Australia. Millions without power and heat for days in Houston after severe winter storms. And a global pandemic with nearly 3.9 million deaths as of the end of June.
News footage of Californians fleeing wildfires or of those living in the Southeast being lashed by high winds might make potential real estate investors decide to pull in their horns and find another place to put their resources. But with the right insurance, buyers can pursue real estate investments, confident that their properties will be protected even in a worst-case scenario.
Measuring the Damage in 2020, in Billions
How bad was 2020, measured by the total costs of the various catastrophic events?
Natural disasters caused approximately $95 billion in damages in the United States, nearly twice the amount of 2019, according to the experts at Munich Re, a leading global provider of reinsurance and primary insurance. Nearly half the total, or about $43 billion, was caused by those thirty Atlantic storms, a record twelve of which made landfall. Convective storms (thunderstorms, tornadoes and the like) racked up around $40 billion, while wildfires caused another $16 billion or so in property losses, with an unusual amount of that damage outside of California.
And 2021 may not be much better. Extreme drought conditions are more widespread across the country than at any time in the last two decades, according to a recent report in The New York Times. The Southwest experienced a brutal heat wave just before summer hit — temperatures were near 120 degrees in Phoenix in mid-June — and the hottest summer months are still ahead.
If 2020 was the year of megafires throughout California, expectation are that it could be worse in 2021. The dry season has arrived early in the Golden State, and not only is it unlikely to let up until October, parched conditions are likely to get more dangerous. Daniel Swain, a climate scientist who spoke to The Times, says that the 2021 forecast for the Golden State is “as bad as it can be” and said there is a “100 percent chance that it gets worse before it gets better.” As for the Atlantic storms that regularly brutalize states like Florida and Texas, hurricane season started June 1, and the National Oceanic and Atmospheric Administration predicts another above-normal season, though maybe not at the historic level of 2020.
So for property owners looking to protect their investment, or those looking to invest in real estate, catastrophe insurance is something they should become familiar with.
The Basics of Catastrophe Insurance
According to the Insurance Information Institute, a catastrophe is a severe natural or man-made disaster resulting in potential insurance claims in excess of $25 million. Depending on where a property is located, an owner must cope with very different risks based on geography and climate. Some of these events require separate coverage, while some are typically included in homeowners, renters, or auto insurance, or can be added as riders.
Some of the disasters that can be covered by catastrophe insurance:
- Hurricanes and tropical storms: Particularly in high-risk areas, coverage for these storms requires a separate policy.
- Earthquakes: Earthquake insurance is available in high-risk areas along fault lines, typically in California, Alaska, or Hawaii.
- Tornadoes and windstorms: While these events may be covered under some homeowners’ policies, windstorm insurance is advisable for those with properties in the Great Plains or the central states area known as Tornado Alley.
- Floods: Flood insurance is a separate policy for homes and is advisable for those living on flood plains or near coastlines. Flood insurance is available through the federal government’s National Flood Insurance Program (NFIP), because the risks of flood insurance tend to be too high for commercial carriers.
- Tsunamis: Insurance against giant waves and the flooding that they cause is typically available only in high-risk areas along coastlines, or on islands like Hawaii.
Like other insurance policies, a property owner generally must pay a deductible when filing a catastrophe claim. And insurers will expect owners to practice reasonable mitigation to lessen the brunt of potential disasters. If a property is in a flood zone, for instance, the HVAC and electrical systems might need to be elevated. If a property is in an area prone to hurricanes, an owner may have to invest in hurricane shutters to safeguard the windows.
It’s important to get guidance from an expert, because these are not standard homeowner’s policies, which are more of a one-size-fits-all proposition.
“When you buy homeowners’ insurance, you’re basically getting the same kind of policy,” says Michelle Afflalo, a principal at Ives Insurance Services, an independent brokerage in San Diego, California. “But investors have many different mindsets. They might get a barebones policy with a $50,000 deductible, anticipating that they are never going to turn in a claim. Alternatively, someone buying property in a higher-risk area who has gone through a big claim before will opt for a very different policy.”
Do I Really Need Catastrophe Insurance? Isn’t It Too Expensive?
On average, only about 6 percent of homeowners file catastrophe claims each year. And so, an “out of sight, out of mind” mentality can take over when it comes to insuring investments against the worst, says Afflalo. “People don’t think about it until they know someone who has been affected or they’ve gone through it themselves,” she says. But an owner of a property that could be hit by an earthquake, flood, or wildfire should be educated about catastrophe insurance before disaster strikes.
It’s also tempting to believe that the lowest quote is the way to go, especially for those operating on tight margins on an investment property. But like most things in life, you get what you pay for.
“There are plenty of companies that make insurance a commodity,” says Afflalo. “You see TV commercials constantly that say you should lower your rate. But in the case of our investors in Florida, when we compare our policies against a new quote from another company, often they don’t cover water or wind.”
Depending on the many factors involved, a policy might range from a few hundred dollars a year anywhere up to $150,000. A qualified broker will get you the most affordable policy that gives the best protection possible.
It’s also crucial to understand that an investment property requires a different type of policy than a primary residence.
“Most consumers don’t understand that there is a landlord policy and a policy you get for your personal residence,” says Karla Rivas, director of business operations for Mynd Property Management.
Fortunately, Mynd has a master policy that offers investors a wide range of protections. For example, it offers $25,000 of flood insurance and earthquake insurance on most of the properties it covers, though separate coverage may be needed in some areas.
The Need for Catastrophic Coverage Is Likely to Grow
While 2021 may not be as calamitous as 2020 on all fronts, the warming climate almost guarantees that natural disasters will bring more fires and floods in the years to come.
“Catastrophe losses will only rise in the future,” says Martin Bertogg, head of catastrophic perils at Swiss Re, one of the world’s largest insurance and reinsurance providers.
That might make real estate investment seem like a daunting prospect to the small investor. But that’s where experts who know the landscape can provide much-needed advice.
“My best advice is: buying investment property and growing your portfolio is great, but you have to understand more than just what the rents are in the area,” says Afflalo. “You have to understand the atmosphere and know what is changing. As you grow your portfolio, you want to work with someone who knows what they’re doing.”
Experts at Mynd can help real estate investors make the right choices and help them protect their investments – come hell or high water.