The news that property owners in Alberta may not be covered by their insurance policies for damage and loss caused by the recent floods has infuriated many Canadians. But until that lack of coverage is addressed, people who live in areas that have a high risk of flooding should consider renting a home, instead of buying.
Losing a home due to catastrophic damage would bankrupt most Canadian families, which is why people get insurance in the first place. Many probably assume that since they have home insurance, they will be covered for anything that happens to their home. Not so. Instead, the wording in home insurance policies refers to " exclusions" for situations that are not covered, and "perils" for events that are covered.
Here are some examples. If lightning strikes, you are likely covered. Water damage from backed up sewers that overflow can be covered, although even that may be an optional benefit the homeowner must specifically add – and pay more for – to their policy. Overland flooding, when the water level is so high that it enters the home through doors and windows, is not covered.
The whole idea behind insurance is to distribute the cost of protecting against severe individual loss amongst a large group who all pay into a pool. Not everyone will have their house burn down, but the few who do can't otherwise afford to replace or fix their homes.
If a house catches on fire, more often than not it can be contained to just that house or a few neighbouring properties. Overland flooding, on the other hand, would rarely damage just one house. Instead, it would impact entire geographic regions, at the same time. The many large bills the insurance companies would be simultaneously on the hook for would require a potentially dramatic increase in the cost of insurance premiums.
Not surprisingly, Canadians have heated opinions when it comes to home insurance. Here are some reader comments left on an earlier story on The Globe and Mail's website (click on their handles to see the full comments):
"…insurance companies do not exist to help people, no business does, and we have no right to expect that. What we do have a right to expect is that they live by their contracts, and that governements [sic] take a role in prescribing what those contracts say." – GBC1
"Go ahead and build in a flood plain but pay the proper insurance premium. If not, don't come to the tax-payer to subsidize your reckless choices. Yes, property values in flood plains will decrease, as they should, to compensate for the extra risk." – Darwin77
This is an emotionally charged issue and the full impact remains to be seen. Will overland flooding coverage be available in the future? Will the premiums rise, and if so, how high? Will all properties located in flood plains in Canada lose value?
Despite the benefits of home ownership, my gut reaction to this thorny insurance quandary – from a personal finance perspective – is that renting is an attractive option for properties in at-risk locations. If the property owner can't indemnify the risk to property, perhaps it's better not to be a property owner until that changes. If overland flooding coverage never becomes available, then property values will have to decline to compensate for the risk.
At this point, home owners in Alberta have had their world turned upside-down by the flooding. Once they return to their homes, they still have to face severe hardship and real financial repercussions. Putting aside the debate between what insurance companies will or won't do, or what our expectations of them are, let's not forget that people need help now. If you would like to make a donation to aid the flood victims through The Red Cross, click here.
Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network. You can read his blog at WhereDoesAllMyMoneyGo.com and follow him on Twitter at @preetbanerjee.