Tuesday, October 4, 2016

REPOST: Why doesn't insurance cover floods, earthquakes, or bed bugs?

Friday, October 3, 2014

Why doesn't insurance cover floods, earthquakes or bed bugs?

Planet Money has another episode that is making me rethink my opposition to government subsidies for public broadcasting.  In The Fine Print, a reporter reads his homeowner's insurance policy.  In it, he discovers that the policy does not pay for:

  • Floods: because floods hit all the homeowners in an area at the same time, so insurers cannot spread the risk around (called "correlated risk");
  • Earthquakes:  due to adverse selection (only the homeowner knows if she built on an active fault); and 
  • Bedbugs:  due to moral hazard (if you knew you were covered for bedbugs, you could pick up furniture off the street without any worry).  


  1. From an investment standpoint, I would hesitate investing in an insurance company with a high load of flood insurance coverage. I looked at homes on the south shore of Long Island which were inside of the flood zones. Most viable insurance companies wouldn’t insure them. I ended up purchasing a home that I could properly insure. Those who do obtain flood insurance may find themselves in a long line waiting to collect from an insolvent insurer.

    Earthquake insurance comes at a hefty price for security. The typical deductible is approximately 15% in California. That means, unless its catastrophic damage, a homeowner will have to cover the first $75,000 in damage before the policy kicks in on a $500,000 home. This is probably an indication of why on 17% of California homes have earthquake insurance. Like flood insurance, it’s hard to think of the unthinkable. Sadly, when catastrophe strikes, even those with insurance have much to complain about.

    Moral hazards stretch far beyond bed bugs. For those who scam insurance companies and reach far beyond the actual financial setback, the rest of the policy holders are left to flip the bill. Everyone else’s insurance premiums go up to cover the difference.

    Esuarance on Allstate Company. (2016, October 17). Retrieved from Does my insurance company cover bed bugs: https://www.esurance.com/info/homeowners/do-homeowners-and-renters-insurance-cover-bed-bugs
    Geology.com. (2016, October 17). Retrieved from Homeowners Insurance Does Not Cover Many Types of Damage : http://geology.com/articles/homeowners-insurance.shtml

  2. This post really hit home for me. With purchasing a house fairly recently, less than two years ago, I have to admit, I am one of the many who didn’t read through their homeowner’s insurance policy. The insurance agent did make it clear that the policy doesn’t cover floods; however, they said I may have to get flood insurance since I live less than a mile away from a large river and a home assessment would have to be completed. Turns out my house isn’t in a flood zone, so I didn’t need it.

    I understand that the insurance agencies have to anticipate adverse selection and attempt to protect themselves from it, but the screening process I had to go through with the first insurance agency I tried to get homeowner’s insurance through was horrendous. An insurance inspector came to my house, saw I had dogs, which I had to prove were not pit bulls (this was the easiest part, since my dogs are not pit bulls), told me I had to fix my gutters that were leaning out a little more than they should, and said I had to replace the ceiling tiles that had stains on them in my basement. The inspector then informed me I had 15 days to complete these things otherwise they wouldn’t cover me.

    Long story short, the insurance company refused to cover me, even after I completed everything they asked me to do in the time frame they had given. To me, I don’t think the insurance company did a good job with their screening process. I had been using the company for just over 5 years at that point for car and motorcycle insurance, always made payments on time, and never submitted a claim. Why didn’t they take this information into account when I applied for homeowner’s insurance?