Climate change may affect your homeowner’s insurance policy in 2 ways

All homeowners can expect their premiums to climb thanks to the rising cost of climate change. Elizabeth Castaneda /EyeEm/Getty Images

You only need to watch the news once to understand that weather events have become more dramatic over the past 10 years.

According to Maryland State Insurance Commissioner Al Redmer, whether you’re talking about tornadoes, floods, hurricanes, or wildfires, “Both the number and severity of natural disasters have increased” – and so have the number of associated homeowner’s insurance claims.

But unfortunately, says Redmer, many homeowners are unprepared for both the personal and financial risks associated with climate change.

“Too many consumers don’t know, and the other half doesn’t care,” Redmer says.

His advice? All homeowners should periodically meet with a trusted risk adviser, like an insurance agent, and do the following.

  1. Identify your own unique exposure to risk.
  2. Quantify that exposure to risk (in dollars).
  3. Make informed decisions about what you are going to do about it.

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No matter how old your current homeowner’s insurance policy is, Redmer says, now is the time to take it out, dust it off, and ask yourself – are you prepared?

How climate change will affect homeowner’s insurance

A March 2019 Esurance report noted that in high-risk areas, insurance companies are starting to charge higher premiums, deductibles are getting larger, and coverage options are shrinking.

Your coverage might not change much if you live outside of a high-risk area, but you can definitely expect the price of your premium to rise steadily since the cost of claims is rising for all insurance providers.

Redmer suggests that all consumers start talking to their financial planners and putting extra money aside to “weather” these premium increases.

Homeowners in high-risk areas may want to add additional coverage for the specific disasters facing their region. Also, since some insurance providers are adding separate deductibles for certain weather-related damage, it may be worth setting side money to pay those fees should the need arise.

What is a high-risk area for homeowner’s insurance?

A home is considered high-risk if it is located in a storm-heavy and/or crime-heavy area. Major high-risk areas include Tornado Alley in the Midwest, the earthquake-prone California coast, arid western forests at risk of wildfires, and coastal Florida peninsula and Gulf regions where hurricanes and flooding are the norm.

That said, the unpredictability of “global weirding” could change everything in the coming years, so it’s best to prepare accordingly and make sure you have enough insurance coverage – you never know what plans climate change may have for your region. A financial planner or insurance adviser can help with this.

What natural disasters are covered by homeowner’s insurance?

While flooding may be foremost on the public’s mind due to rising sea levels and crises around the world, there are other natural disasters that consumers must consider.

The first is wildfires. While we’ve definitely seen more wildfires in the West, insurance coverage for fires won’t change considerably. That’s because wildfires are already covered under fire coverage in most policies. Insurance companies don’t typically make the distinction between a house fire and a wildfire.

What about tornadoes? Most policies cover tornadoes under wind damage. That said, your policy might have a separate deductible for this, says Redmer. Read closely.

As of now, earthquakes are not covered through the typical homeowner’s policy. Redmer says this is not likely to change, so if you live in an earthquake zone, be sure to double check that you’ve added this coverage to your policy.

What to ask when you meet with an insurance adviser

Though most homeowner’s insurance policies are similar, there are some important nuances to ask about. For starters, talk to your insurance adviser about whether a named-peril policy or open-peril policy is best.

The difference between the two is simple: A named-peril policy pays for losses and damages due to causes specifically articulated in your policy. An open-perils policy, sometimes called an all-risk policy, will cover any losses or damages unless something is specifically excluded. There is an extra premium for this type of policy.

Plan now to protect yourself in the future

Climate change has reached the critical tipping point at which it’s not if you will have to endure a weather-related incident, but when.

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For a long time, Redmer had offices on the Eastern Shore of Maryland. Every year, he says, a hurricane would begin brewing in North Carolina or Florida and get a lot of media attention.

His phone would ring off the hook for about two weeks with calls from people asking about adding flood insurance to their policies. But it was too late.

Why? You typically can’t buy flood insurance within 30 days of a possible flooding event. Those customers had no choice but to hope for the best.

When the storm passed, Redmer says his staff would call those customers back and offer to add flood insurance to their policy for a future storm. In many cases, they’d decline, hoping for the best. But planning for the worst is always a better choice.

The bottom line about climate change and insurance coverage

“Insurance premiums are about spreading out the risk and overhead costs of insurance claims,” says Redmer. Even though technology has lowered overhead for most insurance companies, increased frequency of claims means that everyone must pay a little more.

If you have not met with a trusted risk adviser and/or a financial planner about your homeowner’s insurance, it is time to do so. Begin thinking about how you will budget for higher premiums, and also whether adding additional coverage makes sense.

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