Deluxe coverage

Fox, Seth

Hurricanes Katrina and Rita combined for an estimated $250 billion in damages, most of it due to the flooding of New Orleans. Much of that loss will be unrecoverable, because less than half of the people who should have had flood policies actually did, says Carolyn Gorman, vice president of the Insurance Information Institute.

Although the publics attention was largely on flooding in low-income areas such as the Ninth Ward, the waters did not discriminate by income. High-end houses in Lakeview, Metairie and other communities were also damaged or destroyed. Such structures were more likely to have federal flood insurance, but costs will far exceed the government’s coverage in many cases. And few houses had additional coverage to cover the gap.

This should be a wake-up call to metro Baton Rouge, where flood risks are high, but the use of excess flood insurance is not.

Flood insurance, as a rule, is not included in homeowners’ policies. Instead, buyers must go through Federal Emergency Management’s National Flood Insurance Program. The federal insurance covers only up to $250,000 for structural damage and $100,000 for contents inside the home.

FEMA’s insurance typically costs about $400 a year for the first $100,000 of total coverage. Approximately 20,000 communities participate in the flood insurance program, making their residents eligible. If a community is not part of the feds’ program, its residents cannot purchase flood insurance. All the Baton Rouge-area parishes participate.

Although flood insurance premiums can be significantly less than the $400 average, homes in higher risk areas can see even higher premiums. And wide swaths of East Baton Rouge, Ascension and Livingston parishes are in highrisk areas. For total loss on a high-end home in the Baton Rouge area, FEMA coverage would be insufficient.

Coverage to close the gap between the feds’ cap and the value of the home is called excess flood insurance. It is only available after a policy-buyer reaches FEMA’s limit.

“The job of insurance is to try and cover the gaps,” says Wright & Percy CEO Michael Trufant.

Who buys, and why

Industry experts are not sure how prevalent excess flood coverage is here. Most agree it is low, despite being widely available to Greater Baton Rouge residents.

“It’s difficult to buy, and there arerft any records on it,” Gorman says.

Owners of very expensive homes along waterfronts are the only group likely to buy excess coverage. They first go through the FEMA. program as required by law, Gorman says. Then, in case of flood, they use the government money to pay the deductible on the excess coverage.

Most people tend not to buy the extra coverage because a homeowner’s main concern when buying flood insurance is meeting a mortgage lender’s requirements, not actually insuring the asset. Lenders typically require only homes in federally designated flood plains to carry flood coverage, and FEMA’s coverage is sufficient.

“Mortgage companies historically will accept what the federal flood company writes,” says John Lord, who handles personal insurance policies for Wright & Percy.

The cost is significant. Premiums for standard home flood insurance can run upwards of $1,000 in flood zones, while excess flood coverage for the same home can run three or four times that.

Beyond the $250,000 the feds cover, says Trufant, “It really becomes a costbenefit decision.”

And few count the risk of flood as a realistic one, especially in the Baton Rouge area. But high-end homeowners, particularly in newly developed areas, should be aware of the risk. Newer subdivisions tend to be in relatively low areas, because older settlement took the high ground. Even in higher areas, land development often eliminates wet areas and vegetation that previously acted as natural flood controls.

“They’ve basically turned it into a parking lot and put a lot of houses on it,” says Gorman, effectively creating flood areas that maps will not show.

Changes ahead?

Another reason for the low use of excess coverage flood insurance is homeowners typically are not aware of it. Lord says the feds do not go out of their way to promote excess coverage to homeowners.

“They do not mention excess flood insurance because they do not write it.”

Lord says he does make his own clients aware of it. “Have they been taking it? Probably not,” he says. “Ninety to 95% don’t.”

Few companies actually offer excess flood insurance, Gorman adds. Among them are Lloyd’s, AIG and Chubb. Excess flood premiums for AIG begin at $1,200 for $1 million in coverage, while Chubb premiums begin at $1,000 for the same.

Chubb has targeted the high-end homeowners insurance market and is now the leading provider of excess flood insurance nationally, Gorman says.

“If you wanted more [flood coverage], you’re probably already a Chubb client,” Lord observes.

But even now that flood insurance coverage has been pushed to the forefront of national discussions, experts disagree on whether it will be in higher demand.

Lord says he. expects to see locals looking into the possibility of flood insurance after witnessing the flooding following the September storms.

Gorman believes the opposite. Once the images of the flooded Crescent City recede into memory, she thinks people will return to their same old habits.

“It’s because of what people have done in the past,” she says. “Very few [policies] have been sold.”

Copyright Greater Baton Rouge Business Report Oct 25, 2005

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