Property Perils, Exclusions, and Flood Insurance

Understanding what IS and IS NOT covered under Missouri homeowners policies is critical for proper protection.

Major Exclusions in Homeowners Policies

Water Damage Exclusions

Flood and Surface Water (EXCLUDED):

Standard homeowners policies exclude:

• Flood from rivers, streams, or lakes
• Surface water and water below ground
• Waves, tidal water, or overflow of water
• Mudslides caused by flooding
• Water that backs up through sewers or drains (unless endorsement added)

Why Flood is Excluded:

• Catastrophic loss potential
• Correlated risk (many homes damaged simultaneously)
• Requires separate insurance through NFIP

Exam Tip: FLOOD IS NOT COVERED under standard homeowners policies. This is one of the most important exclusions to know. Flood requires separate coverage through the National Flood Insurance Program (NFIP).

Earth Movement Exclusions

Earthquake and Earth Movement (EXCLUDED):

Standard policies exclude:

• Earthquake and tremors
• Landslide and mudslide
• Sinkhole and mine subsidence
• Earth sinking or shifting

Missouri Earthquake Risk:

• New Madrid Seismic Zone in southeast Missouri
• Major earthquakes in 1811-1812 (estimated magnitude 7.5-8.0)
• Ongoing seismic activity
• Earthquake coverage available by endorsement

Earthquake Endorsement Features:

• Separate premium (can be expensive)
• High deductibles (typically 10-15% of dwelling coverage)
• Covers dwelling, personal property, and loss of use
• May have sublimits on certain items

Exam Tip: Missouri has earthquake risk from the New Madrid Seismic Zone. Earthquake coverage is NOT included in standard homeowners policies but can be added by endorsement with separate premium and high deductible.

Other Significant Exclusions

Ordinance or Law:

• Increased costs to comply with building codes
• Available by endorsement
• Important for older homes

Neglect:

• Failure to protect property after loss
• Failure to maintain property

Intentional Loss:

• Damage caused intentionally by insured
• Criminal acts

War and Nuclear Hazard:

• War, civil war, insurrection
• Nuclear reaction or radiation

Business Activities:

• Business pursuits on premises
• Requires separate business policy

National Flood Insurance Program (NFIP)

Missouri Flood Risk

Missouri has significant flood exposure:

High-Risk Areas:

• Properties along Missouri River
• Properties along Mississippi River
• Low-lying areas in floodplains
• Areas near tributary streams

Flood Risk Zones:

• Zone A/AE: High-risk flood zones (100-year floodplain)
• Zone X: Moderate to low-risk zones
• Zone V: High-risk coastal zones (not applicable in Missouri)

Mortgage Requirement:

• Federally-backed mortgages REQUIRE flood insurance if property is in Special Flood Hazard Area (Zone A/AE)

NFIP Coverage Limits and Terms

Standard NFIP Coverage:

What NFIP Covers:

• Building structure and foundation
• Electrical and plumbing systems
• HVAC equipment
• Appliances (refrigerator, stove, dishwasher)
• Personal belongings (if contents coverage purchased)
• Debris removal

What NFIP Does NOT Cover:

• Additional living expenses (loss of use)
• Most basement contents (furniture, personal belongings)
• Landscaping and outdoor structures
• Currency, precious metals, securities
• Cars and vehicles

Exam Tip: NFIP provides up to $250,000 dwelling coverage and $100,000 contents coverage. Basement contents have very limited coverage. Additional living expenses are NOT covered under NFIP.

NFIP Waiting Period

30-Day Waiting Period:

• Flood insurance has 30-day waiting period from purchase date
• Coverage effective on 31st day after application
• Exceptions:
  • Required for mortgage closing (effective at closing)
  • Map revisions placing property in flood zone (30 days from map change)

Exam Tip: The 30-day NFIP waiting period is a common exam question. Coverage doesn't begin until 30 days after purchase (with limited exceptions).

NFIP Eligibility

Community Participation:

• Community must participate in NFIP
• Most Missouri communities participate
• Community must adopt floodplain management ordinances
• Residents can only purchase if community participates

Who Can Purchase:

• Property owners in participating communities
• Renters (contents-only coverage)
• Business owners (commercial flood insurance)

Private Flood Insurance

Alternative to NFIP

Private Market Flood Insurance:

• Offered by private insurers
• May have higher coverage limits than NFIP
• May cover additional living expenses
• Potentially lower premiums in some cases
• Not subject to NFIP rules and restrictions

Advantages:

• Higher dwelling limits (exceeding $250,000)
• Coverage for additional living expenses
• Lower deductibles may be available
• Broader coverage options

Considerations:

• May not satisfy federal mortgage requirements
• Availability varies by insurer and location
• Underwriting stricter than NFIP

Difference Between Flood and Water Backup

Flood (Excluded from Homeowners)

Surface Water and Overflow:

• Rising water from rivers, streams, lakes
• Surface water runoff
• Water overflowing natural boundaries
• Requires NFIP or private flood insurance

Water Backup (Can Be Added to Homeowners)

Sewer and Drain Backup:

• Water backing up through sewer or drain
• Sump pump overflow
• Can be covered by endorsement on homeowners policy
• Common endorsement in Missouri due to heavy rains

Water Backup Endorsement:

• Separate limit ($5,000-$25,000 typical)
• Covers damage from sewer/drain backup
• Does NOT cover flood
• Additional premium required

Exam Tip: Water backup (sewer/drain backup) can be added to homeowners policies by endorsement. This is different from flood coverage. Flood requires separate NFIP policy or private flood insurance.

Coinsurance and Insurance to Value

80% Coinsurance Requirement

Most Missouri homeowners policies include 80% coinsurance clause:

Requirement:

• Must insure dwelling to at least 80% of replacement cost
• Failure to maintain 80% results in partial payment of claims
• Applies to partial losses, not total losses

Coinsurance Penalty Formula:

\[ \text{Amount Paid} = \frac{\text{Amount of Insurance Carried}}{\text{Amount Required (80% of Replacement Cost)}} \times \text{Loss} - \text{Deductible} \]

Example:

• Replacement cost: $200,000
• Required insurance (80%): $160,000
• Actual insurance carried: $120,000
• Fire causes $40,000 damage
• $1,000 deductible

Penalty calculation:

• ($120,000 / $160,000) × $40,000 = $30,000
• $30,000 - $1,000 deductible = $29,000 paid (not $39,000)
• Policyholder is underinsured and pays $10,000 out of pocket

Exam Tip: The 80% coinsurance requirement is heavily tested. If a homeowner fails to insure to at least 80% of replacement cost, they become a co-insurer and receive reduced claim payments on partial losses.

Inflation Guard Endorsement

Automatic Increase Protection:

• Automatically increases coverage limits annually
• Protects against inflation in construction costs
• Typical increase: 2-4% per year
• Helps maintain 80% coinsurance compliance
• Additional premium for endorsement

Why Important in Missouri:

• Construction costs fluctuate
• Natural disasters (tornadoes) increase demand for builders
• Supply chain issues affect material costs
• Prevents unintentional underinsurance