Change May Come for Disaster Insurance

Legislation coming out of Washington just might reduce homeowners' burden for disaster insurance. It's a topic very much on everyone's minds since the mudslide in Oso, Washington. The loss of human life was tragic, but beyond that is the cost of rebuilding. What, if anything, is covered by insurance? How can, or should, homeowners be take care of themselves?

The Disaster Savings Account (DSA) Act of 2014 has been wending its way through a Congressional committee. If passed, it would allow homeowners and renters to set aside up to $5,000 every year in a disaster savings account. (The two companion bills are posted online: H.R. 3989 and S. 1991).

As proposed, the funds are tax-free if they're used to prepare for a disaster—such as installing hurricane shutters or a generator—and for repairs afterward. The money rolls over every year and there's no limit to how much can be accumulated. Contributions can exceed $5,000 but will be taxed. (And if homeowners decide to use the money to upgrade the kitchen with granite countertops, they'll pay taxes.)

"Ultimately, this type of saving will reduce future federal costs to taxpayers since every dollar spent on mitigation can save up to four dollars in future disaster recovery spending," says Representative Dennis Ross (R-FL), co-sponsor of the legislation with Senator Jim Inhofe (R-OK), in a prepared statement. "It's important that we incentivize Americans to build a safety net in the event of personal catastrophic losses from high-cost disasters like floods, hurricanes and tornadoes."

How the funds are used can depend on a formal declaration of a state or federal disaster. But as long as repairs are for damage to a home's structure or surrounding property—lightning strikes a tree that then falls on a house—and it can be proven that the damage was caused by a natural disaster, no formal declaration is needed. The funds also can be used to meet insurance deductibles before insurance coverage kicks in.

The funds also can be used for uninsured personal casualty losses, but that would require a formally declared disaster zone. For example, a tenant who doesn't have renters insurance could use the account tax-free to replace a TV and other personal items damaged by a tornado only if the area was a declared disaster zone.

Owners can use any contractor, including doing the repairs themselves.

The bill is expected to cut insurance costs if enough owners and renters take advantage of the benefits because insurers will be exposed to less risk, said Ross' communications director Katie Hughes in an e-mail. And it will reduce dependence on government resources, she added, though having an account won't affect how much federal assistance a homeowner could get.

"Whether it's a retirement or health savings account, Americans understand the importance of preparing and setting aside funds for the future and these accounts have long been incentivized with federal tax relief," says Inhofe in a prepared statement. "The DSA Act … empowers Americans to take their security into their own hands instead of waiting for an unknown period of time for government assistance or for a costly insurance premium to kick in."

Groups supporting the bill include the Reinsurance Association of America, National Association of Home Builders, American Insurance Association, National Association of Insurance Commissioners, Nature Conservancy, and the Federal Alliance for Safe Homes.

Perhaps not surprisingly, Lowe's and Home Depot also support it.

More on disaster insurance is available at Houselogic.com, published by the National Association of Realtors.

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