Understanding Which Natural Disasters Are Covered By Insurance

By Michael C. Perlmuter, JD, President & General Counsel

The 13 “Oz” novels written by L. Frank Baum regale readers with acts and images of fantastical fantasy.  The tornado lifting a farm house from its Kansas foundation and sent swirling into the atmosphere before dropping mercilessly on the Wicked Witch of the East is but one of the many creative interpretations presented in the 1939 movie adaptation of Baum’s series “The Wonderful Wizard of Oz.” The Munchkin coroner was among the first on the disaster scene, proclaiming the victim not “merely dead,” but “most sincerely dead.”

Baum and script writers at a minimum would likely consider a different twist when approaching the same storytelling today whether in print or broadcast having been subjected to the types of weather-driven events — tornado, hurricane, wildfire, flood — bombarding the United States during recent times . . .

Contemporary versions would be offered in allegory form just as the originals were believed to have been born replacing the coroner with another first responder  —  insurance companies and their claim adjusters.  Instead of delivering the news a local villain was now no longer, the report from the insurers to the homeowners and other members of the community would be updated.  In unified harmony, the insurance company adjusters would chant:

As insiders, we have the policy reviewed
It is exactly as we have constructed and construed
You shall have no worries about a payout overage
As we can most sincerely say, the documents don’t provide a cent of coverage

Indeed, we have been besieged by weather-related calamities, most notably since the OId Testament’s recounting in Exodus of famine and pestilence caused by thunderstorms of hail and fire, swarms of locusts and flies, water turning into blood and much, much more.  These original Acts of God are basic to the Jewish Passover and left the Egyptians powerless to recover.

That brings us to modern-day America (be you a believer in climate change, man-made or not) which has been barraged with weather-driven catastrophe after weather-driven catastrophe. And, not surprisingly, in turn we have been barraged with calls from business owners and homeowners asking whether (not weather!) they are covered for the following perils. This article assumes an All Risk policy, as they are standard in the commercial world today and predominant in the homeowner world today. By definition, an All Risk policy provides coverage for standard perils unless excluded in the policy.

So, in short, here goes, (the easy ones first).

 

Wildfire

This one is easy.

Fire is the basic peril for which property insurance was originally designed. Interestingly, the term “fire” is not defined anywhere in a policy. Additionally, it must be noted that not all fires are covered under a policy. Courts have made a distinction between a “friendly fire” and a “hostile fire.”

A “friendly fire” is one confined to the place it was originally intended. (Logs burning in a fireplace is a good example of “friendly fire.”)  A “hostile fire” is defined as one which has escaped the confines for which it was intended.

Only hostile fires are covered under a standard fire policy.

Note also an insuring agreement only provides coverage for a “direct” loss by fire. That means a fire must be the proximate cause of the loss without an intervening cause. Direct loss does include, however, damage caused by smoke arising from a hostile fire and damage caused by water, etc. used in extinguishing a fire, as well as damage caused by the firemen in fighting the fire.

Lightning

Yes. Although originally a fire policy did not include the peril of lightning, adjusting losses ignited by lightning resulting in fires became next to impossible to adjust.  How do you separate the damages caused by the lightning (not covered) from the damages caused by the fire (covered)? So, today, lightning is a covered peril.

Ok, now let’s get more difficult…

But before we begin, you should be aware that there is a group of nine additional perils typically sold as a package, commonly referred to as “Extended Coverage,” which are standard in today’s property policies. These perils are windstorm, hail, explosion, riot, riot attending a strike, civil commotion, aircraft, vehicles and smoke. So, we don’t need to address these perils.

Now for some other fun weather-driven events…

Tornado

During the past several months, we have witnessed tornadoes striking Oklahoma, Iowa, Indiana, Ohio, Michigan, Wisconsin and Illinois, among other states . . . is that enough? Tornadoes are interesting weather phenomena that are typically classified as anywhere from Category F0 to F5, the last being a Wizard of Oz type storm with winds at 260-316 mph. (I knew we would again tie in the Wizard of Oz!)

Tornadoes move in observable patterns. It isn’t unusual to survey serious tornado damage on one side of a street and essentially no damage to properties directly across the road. In any event, a tornado is a covered loss (windstorm).  

Interestingly, and not because this information belongs in this article, but there are definitely some myths about surviving a tornado that we have been asked through the years. So I thought I would share a few with you:

  • Myth #1: Opening the windows in your home will help equalize pressure inside and help reduce property damage.  False!
  • Myth #2: The southwest corner of the house is the best place to take cover. False!
  • Myth #3: Highway overpasses are good tornado shelters. False!
  • And myth #4: You can’t outrun a tornado. False! In some instances, it may be possible to drive away from an approaching tornado.

But, I digress…

Hurricane

Once upon a time, hurricanes were more commonplace in North America than they seem to be today. With the exception of Superstorm Sandy (which was not technically classified as a hurricane, but which people commonly refer to as a hurricane), there has not been a major hurricane (defined as a Category 3 hurricane or higher) striking the mainland U.S. for more than 10 years — the longest hurricane drought on record.

Hurricane Hermine, which did make landfall over Florida in early September and the first to hit the state since Wilma in 2005, was no more than a Category 1.

Generally speaking, hurricanes bring two major problems: water and wind. First, no standard homeowners’ policies will cover floods (more about this later), even water from a storm surge. Second, whether you have insurance as a result of windstorm from a named hurricane may depend on what state you live in and whether your policy therefore includes coverage.

Most standard polices cover damage caused by windstorms, including hurricanes. But if you live in a coastal state, you likely will need to buy separate windstorm insurance coverage, but beware coverage will likely come with a very large deductible.

Earthquake

Generally speaking, a typical property insurance policy excludes coverage for earthquakes. Or more specifically, the exclusions section of a property policy will commonly state the insurance company “will not pay for loss or damage caused directly or indirectly by . . . earth movement.” And earth movement is commonly defined as “earthquake, landslide, mine subsidence and earth sinking (other than a sinkhole collapse).” However, if earth movement results in a fire or an explosion, your insurance company will typically pay the damage caused by the fire or explosion.

It must be noted, however, that some recent courts have made a distinction between earth movement caused by natural causes versus earth movement caused by man-made activity. Some courts have held  earth movement caused by man-made activities (such as blasting activities or excavation) on an adjacent property resulting in building damage on the “insured” property is covered (despite the earth movement exclusion).

Whether coverage applies in such a circumstance will likely depend on the wording of the exclusion and the concurrent or anti-concurrent causation language in the policy. The doctrine of anti-concurrent causation is a topic for another day and another article! You should also know you can add earthquake coverage to your policy for a fairly nominal amount. Ask your friendly professional insurance agent!

Hail

It is covered. However, hail claims are often contested by the insurance companies with regards to the scope and the damage. Some of the issues are: what if hail damages one portion of a roof but not the entire roof? Or what if hail damages just one shingle on a roof? And, what if that shingle that needs replacing is discontinued and unable to be matched in replacement? These are the difficult issues that can arise from a hail claim in the arena of what is visible to the street or what the state law is on matching of shingles.

Oftentimes, a property owner will not even know that he has suffered damage from hail. The damage may sometimes not appear for several years down the road. Hail claim resolution almost universally requires a professional public adjuster.

And while you’re at it, beware of scam roofing contractors!

And finally…

Flood

I’ve saved the best (or worst, depending on your viewpoint) for last! Every insurance agent probably gets more calls from their clients who suffer “floods” than any other event. The key is to understand what does someone mean when they refer to a “flood.”

In short, water damage to a structure or personal property caused by windblown rain, ice damming, frozen pipes, bursting pipes, snow melting and/or icicles are all covered.

But what about water flowing in your home from the outside, better known in the insurance world as “surface water?” In a typical homeowner’s or commercial policy, it means “no coverage!”

Some basic background knowledge:

  1. Floods are the #1 disaster in the United States;
  2. In the past five years, all 50 states have experienced floods or flash floods;
  3. Total flood claims from 2005-14 averaged more than $3.5 billion per year; and
  4. From 2010 to 2014, the average individual National Flood Insurance Program (NFIP) claim amount was approximately $42,000.

Now the story.

Studies indicate that one of every five people believe “flood” is covered under their homeowner’s policy. This suggests most people understand they only can receive insurance for floods by buying separate flood insurance.

But I don’t believe that number. Our experience is that nearly every insured we receive calls from who have incurred “traditional” flood damage (surface water) believes they are or should be covered by their conventional policy. Needless to say, they are very disappointed when we have to be the bearer of bad news. So how do you protect yourself against a flood? Purchase separate flood insurance, if it is available. 

The NFIP was created in 1968 by the U.S. federal government in an effort to provide standard flood insurance for a risk considered too catastrophic for the private insurance market. (The insurance companies didn’t want the business.)

In short, flood insurance is required if one lives in an area designated as a potential flood zone by the Federal Emergency Management Agency (FEMA). Yet, some 20 to 25% of flood claims come from moderate or low risk areas. How does one determine whether one should buy or not buy flood insurance?

The first place to check is the FEMA map. FEMA maintains maps labeling your risk by zones. (These maps are available on the FEMA website https://msc.fema.gov/portal)  Areas designated as a Special Flood Hazard Area (SFHA) are determined to have a 1% chance of being flooded in any year, and flood insurance is required to be purchased. The FEMA maps label various properties in various zones. Those zones range from areas with a .2% chance of being flooded in any year to areas that could be flooded by concentrated rainfall and drainage problems to areas where the flood depth would be less than 1 foot. If you are in a moderate or minimal risk area, you may want to consider buying flood insurance since 20% of all flood claims come from these areas each year.

To summarize:

Flood damage is not covered by homeowner’s insurance. But, you must understand that flood insurance, which can’t be bundled into a homeowner’s policy, must be bought separately. It also has many limitations (such as exclusions for basements, external features, and certain possessions have limited or no coverage). Homeowner’s flood policies have limits of $250,000 on a dwelling and $100,00 on contents. Commercial flood policies have limits of $500,000 on a building and $500,000 on contents.

Now aren’t you glad you asked all this?

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