Disaster Insurance vs. Property Insurance: What's the Difference?

The basic difference between disaster insurance and property insurance is that disaster insurance is more specialized and covers your losses against immediate occurrences that have disrupted your business, while property insurance covers your property against any number of common property risks, including theft or damage from accidents.

That having been said, the trend of hybridizing everything from mutual funds to cars has also affected the insurance industry. There are now various packages that cover property from a wide range of threats and allow you to buy additional coverage for specific concerns such as flooding.

The key today, with so many options, is to first assess exactly what you need and then work with an insurance agent to figure out the best package: one that covers your most significant risks. It's not an either/or scenario that you want, but a combination of policies that provides protection without duplicating coverage. It is common for business owners to fail to look closely at what is covered by their property insurance and buy another policy that covers many of the same risks. Conversely, many policyholders mistakenly assume disasters such as flooding are covered under one of their policies and don't discover until they're underwater that neither their property insurance nor their disaster insurance covers flooding.

You need to determine how much you are covered for under each portion of your coverage. For example, you could buy a package that provides $5,000,000 in total coverage and includes property, flood, terrorism, and business interruption insurance. Should a flood destroy your business to the tune of $4,000,000, you should be able to collect enough to be completely covered, right? Wrong. You will only collect the amount not allocated to another specific type of damage. If $2,000,000 of the policy covers acts of terrorism, your collection for flood damage would be the remaining $3,000,000 of your policy. The point is, you need to read the fine print very carefully. You also need to weigh the options, compare deductibles and premiums, and look at various scenarios. Always look at the scenarios with the highest likelihood first and then continue down the list.

It is also advisable to buy all of your insurance from one carrier because you will usually save money with riders and packages and it is less likely that your coverage will overlap. Before selecting a carrier, get some recommendations from other business owners in your immediate area. In addition, always ask questions regarding anything in the policy that is not clear.

One way you may notice disaster insurance policies differ from property insurance policies is that often the deductible is not a set fee, but rather based on a percentage of the coverage. When buying earthquake insurance, for example, a 5 percent deductible on a business covered for $250,000 would be $12,500, which is the amount that you would be responsible for in damages. Flood insurance also has some caveats. For example, you may be required to purchase ordinance coverage if the law states that your building did not comply with flood plain building codes and needs to be torn down.

It should be noted that due to the devastation from hurricanes Katrina and Rita in 2005, disaster insurance these days is becoming harder to afford and, in some cases, harder to get as insurance carriers become more hesitant to offer such insurance to areas that need it most. It is for this reason that government disaster insurance may be a hotly contested political issue in the near future.

When choosing disaster insurance, you basically have two choices — a named perils policy or an all-risk policy. Read Choosing Disaster Insurance: Named Perils Policy vs. All-Risk Policy for advice on how to determine which one will best protect your business.