Tornado, Flood, Hurricane, Quake: Are You Covered for a Worst-Case Scenario?

The deadly tornadoes and flooding that affected many parts of the South and Midwest in April, the tragic earthquake in Japan, and a renewed sense of concern for national security after Osama bin Laden's death Sunday underscore the importance for property owners to be ready for a worst-case scenario.

Last week, insurance companies acted quickly to send extra adjusters and mobile units into states where tornadoes touched down, and tens of thousands of homeowners have filed claims. State Farm reported that it has received nearly 24,000 housing and commercial related claims in Tennessee, Alabama, Georgia and Mississippi, as well as nearly 20,000 auto claims in Tennessee and Alabama. Total insured losses from the tornadoes last week are expected to be more than $2 billion -- a high figure for tornado damage but still low compared to damage from hurricanes and earthquakes.

"The industry remains capable and prepared logistically and financially to handle these losses," said Robert Hartwig, president of the Insurance Information Institute.

The cost to rebuild Tuscaloosa, Ala., alone, parts of which were completely leveled, is expected to be between $40 million and $45 million, said Steve Wells, president of the Alabama Municipal Insurance Corporation, a not-for-profit company that provides coverage for the state's municipalities. Wells said he expects more cities and towns -- many of which have been utterly demolished -- to contact the insurance company in the coming week as they get valuation on the damage incurred. The corporation sent $1 million to Tuscaloosa on Tuesday to start repairs to city infrastructure, although significant rebuilding efforts may take weeks or months to get started, Wells said.

"Our job is try to get the cities back up to running and looking normal as soon as possible," said Wells.

Only 10% of California Homes Are Insured for a Quake

For homeowners -- nearly 97% of whom carry insurance nationwide -- wind damage caused by a tornado or hurricane is generally under basic policies. However, some high-risk areas may require additional coverage. Annual premiums for homeowner insurance in Tornado Alley, a region that covers parts of several state across the central United States, tend to be higher than the national average of approximately $800 to account for the added risk from severe weather.

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On average each year, twisters account for $1.1 billion in damages to crops and properties, and cause 80 deaths, according to the Insurance Information Institute. Hurricanes tend to be less deadly but more costly than tornadoes, with a total average cost of $5.1 billion and 20 deaths per year, according to data from NOAA.

Flood and earthquake insurance are two major exceptions to basic homeowner insurance policies. In California, which is almost certain to have an earthquake of 6.7 magnitude or larger in the next 30 years, only one in 10 homes has earthquake insurance, according to the California Earthquake Authority. That leaves the vast majority of homeowners in the state unprepared, said Glenn Pomeroy, CEO of the CEA.

"It's a matter of when, not if," Pomeroy said about the odds of a quake the size of 1994's Northridge temblor hitting in the coming three decades. That seismic event, which struck the San Fernando Valley and injured thousands of people, caused $20 billion in damages.

The massive March 11 earthquake and tsunami in Japan ushered in the largest one-month growth in new policies from California Earthquake Authority: More than 7,000 new policies were created in March. Earthquake insurance policies vary from state to state, although in California, all insurers must offer it as an option, and the cost to homeowners varies widely based on location and property value.

Other Property Dangers

In the last decade, natural catastrophes as well as man-made disasters have cost the global insurance industry billions upon billions of dollars. Hurricane Katrina, which devastated coastal gulf areas and New Orleans in August 2005, is on record as the most expensive natural disaster to date, costing insurers $45 billion in today's dollars.

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The attacks against the World Trade Center in September 2001 cost more than $40 billion in 2010 dollars. It is estimated that losses from the Japan quake in March could add up to $35 billion, according to risk modeling company AIR Worldwide. That doesn't factor in the costs of cleaning up the nuclear contamination from damaged reactors that occurred in the wake of the tsunami.

In the last decade, floods have caused more than $24 billion in losses in the United States, according to the National Flood Insurance Program. Homeowners in high-risk areas can be required to carry flood insurance, which has an average cost of $600 per year. The government-subsidized insurance program, which was created in 1968 by Congress, offers policies to renters, homeowners and businesses. Currently, just over 5.5 million policies are in effect across the country, with the highest concentration in Florida, where there are 2.1 million policies, according to government data. [Learn more about homeowner flood insurance.]

"As we've seen from the damage caused by the recent tornadoes and severe storms that hit the Southeast, as well as flooding all across the country, natural disasters can be devastating," FEMA spokesman Brad Carroll said. "They can happen anytime, anywhere, and often without much warning. While we can't prevent natural disasters, there are steps we can take to get ready for them, such as purchasing flood insurance."

Nuclear accidents are not covered under homeowners insurance because the damage is so pervasive, said Dick Luedke, a spokesman for State Farm Insurance. However, damage incurred from terrorism-related events, including damage from fire, smoke or rioting, may be covered by standard policy, said Hartwig from the Insurance Information Institute. He added that small businesses are not likely to be covered for damage that stems from terrorist event, and they should confer with their providers. Most homeowner policies cover damage from fires, including wildfires, though the coverage can vary depending on location and risk. Notably excluded from most homeowner policies are landslides or mudslides.

Five Tips for Disaster Preparation

1. Know what your insurance covers. Check your policy and see where you are and are not covered, and what your exclusions are. Fill in the gaps with additional coverage if needed. Whether you live in a hail-prone area or coastal hurricane zone, make sure your coverage is up to date and included all the property you want to protect.

2. Inventory and document your belongings and property. In the event of a major disaster, the more detailed your records are, including receipts, inventories, photographs or videos, the more quickly your claim can be processed. Learn more about taking inventory at the Insurance Information Institute.

3. Determine your risk.FEMA provides diagnostic quizzes and worksheets to help property owners determine their level of risk for a natural disaster. The Red Cross provides information specific to a variety of disaster threats. The Centers for Disease Control provides detailed information about how to respond to chemical disasters.

4. Prepare an emergency kit and plan for your family. The government's Ready.gov website offers a complete list of supplies for a basic kit, which recommends a three-day supply of food and water for every member of the household.

5. Buy a hand-crank transistor radio (or battery-powered radios with extra batteries) to get news and information. Access to electricity, telephones and other communication systems may be limited after a major disaster. The Hurricane Store offers a wide selection of hand-powered devices.