Personal Finance

Hawaii homeowners may find their insurance won't cover losses

Key Points
  • If you own a home in an area susceptible to hurricanes, be aware that typical homeowners insurance comes with a hurricane deductible.
  • For water damage that often comes with large storms, however, you need flood insurance.
  • Renters should weigh coverage for their belongings and other storm-related expenses.

As Hurricane Lane pummels Hawaii, hunkered-down residents likely are facing several days before they can emerge to assess the storm's damage. Whether their homeowners insurance will cover it is another issue.

The massive, slow-moving system — downgraded to a Category 3 storm on Thursday — could become the first major hurricane to make landfall on the group of islands in 26 years.

Already, Lane is unleashing dangerous winds and torrential rain. More than 30 inches has fallen on Hawaii's Big Island, causing catastrophic flooding, according to the National Weather Service.

Unlike most homeowners insurance in other states, policies in Hawaii generally exclude hurricanes from coverage. If there's a mortgage on the property, the lender will likely require a policy, however.

This NASA satellite imagery shows Hurricane Lane in the Central Pacific Ocean southeast of the Hawaiian Islands Aug. 22, 2018.

Hurricane policies, however, don't cover flood damage. As with homeowners elsewhere, that means Hawaii residents must purchase flood insurance separately to get coverage from water damage that often comes with major storms.

For flood zones in Hawaii, lenders typically will also require flood insurance. But in areas where it's not required, homeowners appear to bypass a policy: Compared with the roughly 543,000 households in the state as measured by the Census Bureau, about 60,100 flood insurance policies were in force in 2016, according to the National Flood Insurance Program.

"When it's optional, people might think they don't need it," said Michael Barry, a spokesman for the Insurance Information Institute.

When it's optional, people might think they don't need it.
Michael Barry
spokesman for the Insurance Information Institutes

It's a risk not to have flood coverage if you live in an area prone to storms. As many past hurricane victims know, it only takes one major storm to seriously damage — or destroy — your home.

"Most people fail to read their [homeowners] insurance contract to understand what's covered and what's not, and then they're surprised after an event when they discover they didn't have the coverage," said Lynne McChristian, a consultant to the Insurance Information Institute.

Last year, the season included monster hurricanes Harvey, Irma and Maria. Combined, they caused $265 billion in damage, according to the National Oceanic and Atmospheric Administration.

The last massive storm that hit Hawaii, Hurricane Iniki in 1992, caused $1.6 billion in insured losses, which is about $2.9 billion in today's dollars, according to the Insurance Information Institute.

Here are the best tips for making sure you're prepared if the next big storm heads your way.

Check your hurricane deductible

There's a good chance your homeowners insurance policy has a hurricane deductible. In 19 states, it's a given. In others, it depends on your policy.

Either way, that deductible typically ranges from about 1 percent to 5 percent, depending on the specifics of your insurance contract. Some homeowners might opt for an even higher deductible if it's available.

It's important to note that the percentage is based on your insured value, not the damage caused. So if your home is insured for $200,000 and you have a 2 percent hurricane deductible, you'll pay $4,000 even if the damage is $10,000.

This means you need a plan to cover your share in the aftermath of a disaster. Setting aside savings is tricky. Some insurance companies offer policies to cover your deductible.

"People should never take a higher deductible than they can afford," McChristian said. "Now's a good time to look at it and make sure you're comfortable with it."

Prepare for flooding

While most homeowners policies cover wind damage, they generally exclude flood damage. Yet floods are often what cause the most destruction.

"Most people who live in areas where hurricanes are a threat are also at risk of flooding," McChristian said.

For coverage, you'll need flood insurance through the federal National Flood Insurance Program or a private insurer. Be aware, however, that there are coverage exclusions and limitations.

For example, a government flood policy won't cover all of your belongings in your basement outside of things such as washers and dryers and water heaters. Separate insurance would be required.

If you think you might want a flood policy, don't wait for storm clouds to appear on the horizon. It will take 30 days to take effect.

Renters are vulnerable, too

Even if you don't own your home, your finances are still at risk if a storm barrels through and damages the house or building you live in.

Renter's insurance is an option for covering your belongings.

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"People underestimate the value of their [belongings] when they rent," McChristian said. "You can easily have tens of thousands of dollars' worth of contents in your home."

It also can cover the cost of having to live somewhere else if you cannot remain in your home after a storm.

Rebuilding an older home

If you have an older home and it is substantially damaged, it has to be rebuilt in accordance with current building codes.

Chances are those codes are stricter than when an older home was built.

"It can end up costing 25 percent to 50 percent more if you have to rebuild your home under a newer code," McChristian said.

Not surprisingly, there's an insurance policy for that. Called building ordinance and law coverage, it can cover the extra expenses involved in bringing your house up to code.

Safeguard your documents

One of the last things you want to deal with when your home is damaged is not knowing where your important records are.

"There are some documents you will need right away after a disaster or tragedy strikes, and others that you may not need right away but will be very difficult to replace if they are lost or destroyed," said Neal Stern, a CPA and member of the American Institute of CPAs' Financial Literacy Commission.

Make sure records such as your insurance policies, title to your car, birth certificate and the like are safely stowed in a fire- and flood-proof lockbox or similar option (i.e., a safe deposit box at a bank).

Stern also recommends keeping copies of important documents in a location away from your home, such as with a relative or close friend. Or, if you have online cloud storage, you can keep copies there.