Natural disasters don’t necessarily have to be financial disasters

By Richard A. McGrath, CIC, LIA

Recent earthquakes in Haiti and Chile, coupled with flooding throughout our own state of Massachusetts, provide reminders that natural disasters can strike anywhere, at anytime, and create billions of dollars in damages.

Unfortunately, no one can predict when or where a natural disaster will strike.  And your homeowner’s insurance may provide limited coverage you might need to protect yourself and your family.  Typically, homeowners’ insurance excludes earthquake and flood risk.

In fact, depending on where your home is located, you may find it difficult to get the coverage you need most.  For example, some insurance companies have decided not to insure coastal properties because of the higher risks of flood and wind damage.

Flooding.  For Massachusetts residents, flooding may be the greatest potential danger.  According to statistics from the Federal Emergency Management Agency (FEMA), flood losses in Massachusetts from 1978 through 2009 totaled $282,340,239.  Recent heavy rain resulted in more than 11,000 claims from homeowners in Massachusetts and Rhode Island.

Even if your home is not located in a flood plain, you should be aware that, according to FEMA:

  • One out of four floods takes place in a low-risk area.
  • 20% to 25% of claims come from low- to moderate-risk areas.
  • Over a 30-year period, the probability of having a fire is only 4%, while the probability of flooding is 26%.

You probably wouldn’t think of not insuring your home in case of a fire, yet the probability of flood damage is more than six times higher than the probability of fire damage.

Flood insurance is typically available from the National Flood Insurance Program (NFIP), which is operated by FEMA.  NFIP recently expired, but the U.S. Congress reauthorized it after returning from its recent recess.  However, it is scheduled to expire again on May 30, 2010.  Because flood insurance is often required to close on mortgages in flood plain areas, some real estate transactions that occurred during the lapse in program coverage could not be completed.
Your insurance agent can, of course, help to ensure that you have proper flood protection.

Hurricanes.  Hurricanes, of course, are also a problem that Massachusetts residents have to worry about.  While there have not been any severe hurricanes here in recent years, AccuWeather, a commercial weather service, has predicted that the coming hurricane season is likely to bring five major storms, including two or three that will be classified as category three, which include winds of 111 to 130 mph.

Nationally, of course, hurricanes such as Katrina have caused severe damage.  In 2008, five major hurricanes hit the U.S., including Ike, which caused $12.5 billion in damage.

While New England has not been affected by hurricanes as much as the southeast U.S., historically we have had our share of serious damage.  For example, a hurricane that struck New England in 1938 killed 600 people.  In 2006, AccuWeather said conditions were ripe for a hurricane of that magnitude in New England, but it, of course, never materialized.

Until 2006, hurricane insurance in Massachusetts was relatively inexpensive.  However, the company whose computer model was used for underwriting purposes tweaked its model and significantly increased the damage estimates from a hurricane striking coastal areas.

Reinsurance companies – the companies that insure insurance companies against catastrophic losses – increased their rates as a result, causing many regional insurers to abandon the market.  As a result, the Massachusetts Fair Plan, the state’s insurer of last resort for homes located in hurricane-prone areas, increased its share of the market from 4 percent in 2000 to 33 percent in 2006.

The lack of any hurricanes in Massachusetts since then has benefited Massachusetts Fair Plan, but that could change at any time.

If your home is in an area that is at high risk for hurricane damage, you may have no choice other than to purchase insurance though the Massachusetts Fair Plan.  Homeowners’ insurance includes hurricane coverage under a peril known as wind damage.  However, some insurance companies mandate a specific deductible higher than what typical homeowners are accustomed to paying.  Ask your agent what type of deductibles may be available to you for hurricane/wind protection.

Earthquakes.  To Massachusetts residents, an earthquake may seem like a remote possibility, yet, according the U.S. Geological Survey, “Earthquakes can strike any location at any time.”  Weston Observatory in Boston has reported a tremendous amount of frequency of tremor in Massachusetts.  In the insurance industry, frequency is often a precursor to severity.  Given the very real possibility of larger, more severe activity, earthquake coverage is recommended.

In fact, Massachusetts has been hit by 19 earthquakes of intensity 5 or greater on the Richter scale since earthquakes were first tracked.  An earthquake of 6 or less typically causes minor damage, but earthquakes above that level of intensity often cause major damage, especially when they occur in highly populated areas.
If you live in Massachusetts, the possibility that an earthquake will cause damage to your property is relatively remote, but it could happen.  Fortunately, because we are not located in an area prone to earthquakes, the cost of adding earthquake protection to your insurance policy is low.

Protecting Your Family

So how can you protect your family and your home from potential natural disasters?

Have your insurance agent develop a complete insurance plan and review of your specific exposures.  Your insurance agent should make you aware of the costs, coverage and exposures that a family could encounter in New England that may put your family at risk.  Once your specific insurance review is complete, you can make an informed decision about whether it is worth purchasing coverage.

You can’t control the weather.  But you can control the impact it will have on you and your family.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at

This article is written for informational purposes only and should not be construed as providing legal advice.