What is Catastrophic Insurance In Real Estate? 8 Things (2024) You Should Know

Catastrophic insurance, also called catastrophe insurance, is insurance coverage for major, unexpected events.

It provides financial protection against natural disasters, accidents, or serious illnesses.

Landowners invest in catastrophic insurance because it can help protect their property in the event of an unforeseen disaster.

If you’re considering this type of coverage for your land, here’s what you should know about how catastrophic insurance works and what you should consider before purchasing this kind of coverage.

1. What is catastrophic insurance?

This type of insurance policy protects against major, unexpected events that may result in significant financial losses.

Catastrophic insurance protects against accidents, natural disasters, or serious illnesses that’ll prompt high medical bills or lost incomes.

2. How is catastrophic insurance different from traditional property or health insurance?

At first glance, many people often wonder why you’d invest in catastrophic insurance.

Insurance that protects against “major and unexpected events that may result in significant financial losses” sounds similar to traditional homeowners insurance and health insurance in many ways.

However, catastrophic insurance protects businesses and residences in low-probability, high-cost events.

These events are generally excluded from traditional policies.

Examples of these low-probably, high-cost events include earthquakes, floods, hurricanes, and human-made disasters like riots and terrorist attacks.

3. How does catastrophic insurance work?

Homeowner’s insurance and health insurance typically exclude certain events.

To protect against loss or damages, it can be wise to purchase catastrophic insurance.

This type of insurance is not a replacement for traditional property or health insurance.

You’ll still need to be insured on those fronts.

However, after reading through those policies, you may want to purchase coverage that helps to prevent loss in major events.

So, how do you know what your property insurance covers?

Your policy will name the perils that you are covered in, and these perils can change from insurance company to insurance company.

Some companies even offer an “all perils” policy, but don’t be fooled.

There are limits to these policies as well.

They do not guarantee that you’ll be fully insured in a major loss.

When you go to purchase catastrophic insurance, you’ll be able to select a specific type.

These types of insurance are specific to disasters, and it’s worth thinking about which kinds of disasters your land is most susceptible to.

Examples of special catastrophe insurance available for natural disasters include:

bulletFlooding

Standard homeowner’s insurance policies don’t cover flood damage.

You’ll always need to purchase a separate policy to ensure you are protected in the case of flooding.

bulletStorms (hurricanes and tornadoes)

Catastrophic insurance is a great way to protect your home from serious storms.

Although traditional homeowner’s insurance policies often cover severe thunderstorms, hurricanes and tornados are better covered through catastrophic insurance because they are more extreme.

bulletEarthquakes

Unfortunately, homeowner’s insurance policies (and renter’s policies) don’t cover any damage to your home if it occurs during an earthquake.

Some people choose to do add-on coverage to their existing policy or get coverage through catastrophic insurance.

bulletWildfires

Although homeowner’s policies will sometimes cover wildfires, there are also instances in which the insurance company will raise rates or deny coverage in certain areas.

This could be an instance when you want to investigate catastrophic insurance.

bulletOther instances

Here are some other instances in which to investigate catastrophic insurance: volcanos, landslides, mudslides, riots, sinkholes, terrorism, tsunamis, and vandalism.

Once you’ve decided how to insure your land, you can purchase catastrophic insurance policies that are tailored to your specific needs and risks.

If a catastrophic event occurs, you (the policyholder) will file a claim with the insurance company.

The insurance will conduct an investigation to determine the proper coverage amount.

The costs covered will depend on the policy and the event.

4. When should you plan to purchase catastrophic insurance?

It’s a big question to ask — do you need catastrophe coverage?

Disasters are unpredictable but not every area is at as high risk as others.

Here are some questions you can ask yourself to begin discerning whether this is a smart move for you and your property.

bulletDo you live in an area that is at high risk for tornadoes?

bulletAre you in a coastal region that is at high risk for tropical storms, flooding, or tsunamis?

bulletDo you live on a floodplain?

Does your community participate in the National Flood Insurance Program?

bulletIs your home near a forest or dry desert brush?

bulletDo you live on or near any fault lines?

To make an informed decision, you often need to know quite a bit about the geography where your land lies.

This will allow you to select the correct insurance coverage to protect your home.

We recommend working with a trusted insurance agent to determine your coverage needs.

They can help you create a tailored plan that offers you coverage and peace of mind.

It’s also worth keeping in mind that certain agents will require catastrophe insurance if you’re in a disaster-prone area, so they’ll let you know what you need.

5. Can I protect my business from property catastrophes?

If you own land and have built a business on that land, it only follows that you want to do everything in your power to protect your land.

This land houses your livelihood, and if anything were to happen to it, it could jeopardize your way of life.

So, here are some ways you can protect yourself from disasters and financial fallout that may occur because of them.

bulletGet insured — catastrophic insurance allows landowners and business owners in high-risk areas to feel more confident about the “what ifs” in life

bulletIncrease your cash reserves, so you can afford to pay your expenses when/if a disaster strikes

bulletMove to lower-risk areas to reduce the likelihood of property damage if an event occurs

bulletPrioritize property upkeep, which will ensure your property is resilient against disasters

bulletImprove physical structures to ensure your property is in peak physical condition, which can prevent or minimize damage

Although you can’t control disasters, you can prepare for them.

When your business is properly prepared, you reduce your risk and ensure you’re more successful long-term.

6. Can I protect my home from catastrophes?

If your land houses your home, getting insurance is the first step toward protection.

However, there are some other steps you can take in your daily life to ensure that your home is protected from major storms or events in your area.

Here are some tips to help you maximize protection and minimize damage.

bulletBring in lawn items or outdoor furniture ahead of a storm

These items could be lifted by strong wind and become projectiles.

bulletCheck weatherstrips for cracks or leaks and replace them

Weatherstrips help to waterproof your home and will help prevent flooding.

bulletClean out your rain gutters each season for proper evacuation of rainwater

If you don’t already have this on your to-do list for fall and spring, make sure you put it there.

bulletMaintain your home to prevent wear and tear

You may not realize it, but neglecting simple home maintenance tasks will prompt your home to deteriorate much faster.

bulletLift appliances a few inches off the ground ahead of a storm

If your home does flood, you will prevent them from getting damaged.

bulletReplace loose or broken shingles

Your roof is your first line of protection against storms — make sure it starts in the best shape possible.

bulletSecure all external structures to the ground or foundation

This includes carports, porches, and sheds.

bulletTrim overhanging tree limbs once a year

This will prevent them from falling on your car or house during a storm.

bulletUpdate your garage doors to allow them to prevent higher wind speeds

While this may seem like a lot of time and effort, know that your homeowner’s insurance policy will likely reward you for these steps.

They like when homeowners take proactive steps to mitigate damage because it reduces their likelihood of having to make a big payout.

Therefore, they’re often willing to give a discount on policies to homeowners who have made improvements.

7. What’s the difference between catastrophic insurance and hazard insurance?

The terms catastrophic insurance and hazard insurance are often used interchangeably.

However, hazard insurance generally refers to a section in a homeowner’s policy that covers “acts of God”, like volcano eruptions, lightning, tornados, etc.

Catastrophic insurance refers to a separate, standalone (and more far-reaching) policy that covers both acts of God and man-made disasters.  

You may also hear of catastrophe health plans, which are designed to help pay for major medical emergencies, accidents, and illnesses.

Think of catastrophic insurance as a similar policy for land.

8. Should you consider purchasing catastrophic insurance as a landowner?

Yes, absolutely.

Here are the top reasons that landowners in the U.S. should consider catastrophic insurance.

bulletReason #1: Property Ownership is Risky

There’s no way around it.

When you purchase property, you incur risks.

Whether it’s the risk of damage due to a natural disaster or some other type of accident, you don’t want to be held financially responsible for these instances.

When you purchase catastrophic insurance, you provide financial protection against these risks.

This helps make sure that landowners do not have significant financial losses if a catastrophic event occurs.

bulletReason #2: Insurance Protects Income

If you use your land for income as many landowners do, then catastrophic insurance can protect you against income loss.

If a catastrophic event occurs, your policy can help provide a safety net to cover your lost income or additional expenses associated with the event.

You’ll need time to repair your property, so you can continue to run your farm, rent out your land to vacationers, etc.

bulletReason #3: An Extra Step for Peace of Mind

Catastrophic insurance may seem like an extra step (and additional money!) for no reason.

Floods, hurricanes, tornados, and other acts of God are unexpected events.

Many landowners will toy with the idea of rolling the dice because they don’t want to make the investment for something that doesn’t seem necessary.

However, having this policy in place can give you peace of mind.

Unexpected events are unforeseen for a reason, and some extra money upfront to know you have a plan in place is worthwhile.

Note: While catastrophic insurance is most relevant to landowners, some types of catastrophic insurance could be helpful to renters.

For instance, flooding and flood damage are not typically covered under rental policies, so getting an add-on catastrophic flood policy could ensure that you’re protected in this unforeseen event.

Final Thoughts

Are you wracked with worries about what would happen to your land in a natural disaster or other catastrophic event?

It’s time to make an investment in catastrophic insurance, which will protect your property and assets when unexpected incidents occur.

While homeowner’s insurance is a great start, it isn’t 100 percent reliable.

Taking this additional step will ensure landowners are not left with significant financial losses.

Just be sure to research the right catastrophic insurance policy for you, so you can select the best policy for you and your land

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Erika Gokce Capital

Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.

Erika

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