Natural Disasters Covered by Increased Insurance

California residents know they live in an area prone to its share of natural disasters. We worry about fires all summer and mudslides all winter. We prepare for earthquakes, and we wonder about the effects of a tsunami.

All that worrying is well-founded, too. Although we (fortunately) have not seen any major conflagrations, fires have sprouted throughout Bay Area and made national news when they erupted in Southern California. Lest we get too complacent, we have only to watch the news to realize that yes, those fires and earthquakes and tsunamis and flooding from hurricanes could have happened here - and they might the next time.

That means that, while homeowners may question the need for some repairs and maintenance, few, if any, question the need for homeowners insurance.

But after a large natural disaster, homeowners often find that they aren't fully insured. Even if they scrutinize their policy regularly, a funny thing happens after a large disaster. Because of the need for many contractors to rebuild and repair many homes after a large-scale disaster, too few qualified contractors are generally being asked to work on too many homes.
The result is that the laws of supply and demand kick in, making the cost of rebuilding after such a disaster considerably more expensive than rebuilding when the tragedy is more personal in scope.

Instead of building costs that are closely matched with a homeowners expectations and going market rates, rebuilding costs may skyrocket, jumping from 135 per cent to 175 per cent of normal.

It's a problem that confounds insurers. After all, who wants to insure a home, only to have the homeowners realize they can't afford to rebuild because of a sudden increase in contracting prices?

"We've seen this phenomenon, not only here, but across the country," says Mark Simmonds, Director of State Operations for Liberty Mutual Group.