Should You Adjust Your Home Insurance for Climate Change?

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Weather-related disasters have increased in recent decades, according to the World Meteorological Organization, leaving billions of dollars of damage in their wake. As more frequent and devastating natural disasters, from hurricanes to wildfires to heat waves, change the landscape of the planet, the way you think about insurance may also have to change.

When you buy a home, you're typically required to at least carry a general homeowners insurance policy to protect your property and belongings. While theft and damage from fire, wind and hail are usually covered, floods and earthquakes aren't, leaving residents in those areas with the decision to buy separate insurance policies for those.

Climate change is causing many homeowners to reevaluate their coverage or find new policies, and in some cases, pay more for the same coverage.

Climate Change's Impact on Insurance

With extreme weather on the rise, Americans are already starting to see changes to home insurance:

  • Rising rates: In some areas, premiums for homeowners insurance and other forms of insurance are rising. This is more problematic in places with recent natural disasters or now considered higher-risk due to climate change. Swiss Re Institute estimates global property insurance premiums will rise by 5.3% annually through 2040.
  • Dropped customers: Others are dropped by their insurance providers and struggle to find new coverage. In high-risk fire areas in California, insurers have canceled or failed to renew hundreds of thousands of home insurance policies in recent years.
  • Lack of coverage: Homeowners who live in areas notoriously vulnerable to weather emergencies such as hurricanes can plan accordingly and carry flood insurance if they can afford it. But climate change is bringing extreme weather to unexpected places; look at New York City, which in September 2021 was stunned by historic flash floods following two tropical storms. Thousands of residents whose homes and belongings were destroyed had no flood insurance, because it seemed unnecessary. While the Federal Emergency Management Agency (FEMA) disburses aid via application in these crises, weather disasters that aren't covered by insurance can leave those affected in financial ruin.

Climate change can also impact other forms of insurance, according to a 2021 report on climate change by InsuranceQuotes.com:

  • Travel insurance, especially policies that can be cancelled for any reason, have become more popular and will likely rise in demand as climate change worsens. That's because travelers may increasingly need to cancel trips to high-risk areas experiencing a disaster or have coverage for emergency evacuations.
  • Health insurance could be more crucial, and more expensive, as climate change impacts health. For example, poor air quality from fires could worsen respiratory disease, and heatwaves or droughts could impact seniors or those with pre-existing health conditions. This could also have a ripple effect on life insurance costs.

Take Another Look at Your Coverage

If you're uncertain of what your home insurance covers, or you're concerned about new weather threats from climate change, take action now. Read your policy and contact your insurer with any questions about exactly what's covered.

Additionally, ask if you're adequately protected for emerging extreme weather that may be a result of climate change, and if you should consider adding any coverage. For example, if your area has seen an increase in heavy rains in recent years, it may be worth adding flood insurance.

If your current insurer isn't helpful with assessing future risk, find and consult with an insurance expert. Look for someone who can advise you on how climate change may impact weather and optimal insurance coverage in your area. It may be that nothing should be adjusted now, but it's wise to find out.

Look for Ways to Reduce Risk and Expense

According to analyst firm McKinsey, insurers would be smart to increasingly help customers mitigate risk before disaster strikes and avoid filing a claim afterward. The organization gives an example of one insurer whose homeowners insurance clients get access to wildfire defense services, such as relocating valuables and sending out fire professionals to help when wildfires approach. Ask your insurer if they offer any services to help prevent emergencies.

Additionally, some organizations have incentives that protect homeowners and reduce financial burdens. For example, in California, some insurers are offering insurance premium discounts to homeowners who take steps to "harden their homes" against wildfires. Consider looking for an insurer that provides a price break for adding weatherproofing.

What if Your Policy Is Cancelled?

Insurance companies sometimes drop customers instead of letting them renew their policies due to the cost of insuring them.

When this happened in California, homeowners who couldn't qualify for a policy with another insurer were forced to turn to California's Fair Access to Insurance Requirements (FAIR) Plan, the state's "property insurer of last resort." While this was a bare-bones, temporary solution, California's Insurance Commissioner Ricardo Lara announced in September that the program would increase coverage.

In October 2021, Lara also placed a one-year moratorium on insurance companies canceling or refusing to renew home insurance policies for those impacted by wildfires.

If your home insurance policy is canceled or not renewed—whether in California due to wildfires or elsewhere due to another emergency—try these steps:

  1. Contact your state's department of insurance to ensure the company isn't breaking any laws. For example, by not giving you minimum required notice or not adhering to a moratorium.
  2. Ask your carrier if you could make any changes to get insured by them again.
  3. If the answer is no, try shopping around for other insurance. Find out who your neighbors use since those companies already insure in your area. Alternatively, try an independent insurance agent who works with multiple companies.
  4. If standard carriers won't cover you, your state may offer a FAIR Plan that provides bare-bones coverage for those unable to obtain it elsewhere.
  5. Another option is to look into surplus or excess line carriers, or non-admitted carriers, that offer insurance when others won't. There are limitations, however, and coverage may be more expensive. There are also premier insurance carriers, specializing in higher-risk properties, but the home typically must be over a certain value to qualify.

Keep Your Credit Above Water

If a disaster does strike and you need to borrow money, it's helpful to have a strong credit score. Higher credit scores make it easier to qualify for loans and lines of credit, and at better rates and terms. To see where you stand, check your credit score for free with Experian.

In many states, your credit health also has the potential to affect your insurance premiums. If you live in a state where insurance carriers can consider your credit-based insurance score, taking steps to improve your credit score could save you money.

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