The trend in the US has been to separate cover for specific perils. Kevin McCarty argues that multi-peril insurance would be so much better.

Recent weeks have been a sad time for many residents of the United States heartland as flooding caused the failure of numerous levees along the Mississippi River creating widespread damage, destruction and loss of life.

As the flooding subsided, many residents no doubt also received additional bad news – the destruction of their home by flooding is not covered by their standard homeowners insurance policy.

It is at times like this that the basic homeowners insurance policy is becoming an increasingly confusing instrument for many consumers.

But there is a solution that could help reduce the confusion consumers face with insurance: Create one standard multi-peril policy that fairly represents all risks.

Initially the “all-risks” policy may cost more, but it could potentially save billions of dollars in federal bail-outs and litigation. It also could save Americans from perhaps the greatest expense – waiting for the insurance companies, government agencies and often time-consuming litigation to be resolved prior to rebuilding their lives.

The trend in the United States has been to separate coverage for specific perils (hurricane, flood, earthquake), some optional some mandatory, creating a patchwork of government authorities, policies and coverages in addition to the standard homeowners policy.

US insurance companies do not cover floods, so in 1968 the US Congress created the National Flood Insurance Programme. But, many people who live in designated flood plains do not have this protection.

In Florida, the issue of flood coverage is more complicated. Damage from major storms is often caused by water related to hurricane-driven storm surge. The insurance industry often has deemed this to be “flood” damage and, therefore, not covered by a homeowners policy. Indeed, Florida property owners commonly have three or four policies in place to insure their homes.

Wildfires, tornadoes, flooding and earthquakes do not have the same geographic limits as hurricanes but can cause similar amounts of damage. Post-event government financing of catastrophic events is not efficient. A better alternative is to transform the role of private insurance in the United States.

An all-perils policy would eliminate the guess work and ensure that homeowners have the peace of mind of knowing that their policy will cover all possible types of natural disasters.

Kevin McCarty is the Florida Insurance Commissioner.