For those of you who do not live in or near Columbus, ours is the southern Indiana community whose hospital was forced to evacuate due to recent flooding. I was attending a conference while the heaviest rain was falling and returned a few days later to find both our home and office untouched. Although we were spared, several friends and clients are cleaning up terrible messes and they are just a few of the many families in the area doing the same. FEMA is now on the scene and local volunteers have been hard at work since the rain stopped.

I have heard it said that lightning never strikes in the same place twice. Yet I know it can, because lightning strikes are governed by the laws of physics. The highest point in a landscape last week is probably still the highest point this week. If lightning has struck that place once it could easily strike there again. In the same way, the lowest point in any area is likely to be the one that floods, perhaps more than once.

Witnessing a flood is one of the scariest things that any of us is likely to experience. You can see the water rising but there is almost never anything which can be done to stop it. To help reduce the financial impact of floods, our entire country has been mapped based on the potential for flooding. Most property owners in an area which is likely to flood, even once every 100 years, are required to carry flood insurance. But last week, in Columbus and elsewhere, many of the flooded homes were uninsured because they were in zones considered likely to flood once in 500 years or even less often.

All of this leads to the question, "Should homeowners in the 500-year flood area in southern Indiana or the over-500-year flood area in Iowa have purchased insurance?" Such decisions are rarely simple ones. After watching TV coverage of the destruction, the answer might seem obvious but all insurance costs money and people tend to resist buying protection against an event which seems unlikely to happen. As I understand it, Columbus has experienced three "100-year floods" in the past 95 years. Whether due to changing weather patterns or the fact that our society is now paving areas where water was once absorbed into the ground, I suspect flooding may occur more, rather than less, frequently in the future.

One way to approach any question related to insurance coverage is to think of it as a hedge, a concept which originated with the game of roulette. Hedging allows a player to bet on two or more numbers at once, although with a reduced payout for a winner. In the world of financial planning, insurance offers one of our most useful forms of hedging. We help clients decide which risks to keep for themselves and which ones to share with an insurance company. Decisions about whether to insure, and for how much, can’t be made "in general". They must be considered in the context of a specific situation. A relatively wealthy individual might be quite able to afford insurance but might also be able to survive an uninsured loss. Someone who apparently cannot afford insurance might, in fact, lose everything by going uninsured.

Assessing risk can be very difficult. For example, the city of Columbus is undergoing a series of major renovation projects, including the tear-down and replacement of The Commons, a downtown mall, indoor park and gathering place. Those of you who have been inside The Commons will probably remember Chaos I, a kinetic sculpture by Jean Tinguely. When in motion, gears are turning, balls are traveling down a wire cage and there’s a lot of clanking going on. It is certainly a world class piece of art, yet from another perspective, it’s just a collection of scrap metal. It was constructed almost entirely from items found at Kroot’s, our local salvage yard. What is its value? How much should it have been insured for during the tear-down of the old mall?

Determining the cost of insuring against the risk of flood damage is fairly simple. Your insurance agent can almost certainly arrange coverage for your home (possibly through a FEMA sub-agency) but the decision about purchasing it is still yours to make. Of course, premiums are based on the likelihood of it being flooded. According to FEMA, the average premium in the 100-year flood zone is around $400 per year for structural coverage. Dwellings in lower risk areas can often be covered for less than $150 per year, again for structural damage. Most people should consider insurance on their contents as well.

Helping clients manage risk is an important part of what we do at Warren Ward Associates and helping them make decisions about insurance is a critical part of that process. As no two situations are identical, it isn’t always easy to answer the kind of questions I have raised. If you are a client of WWA, we will work with you on these issues. If not, your insurance agent should have ready answers for your specific case. If your agent is unable to meet your needs, we will try to help you locate one who can.