Question

Sally just purchased a beautiful home on a riverbank for what she thought was a very good deal. She later learned that her house was very susceptible to flood damage during the rainy season. Which of the following statements best describes the effect the location of Sally’s new home will have on her homeowners insurance premium?
a.
Financial loss due to flood damage is likely. Her insurance premiums will be higher than homes not on the waterfront.
b.
Since floods are likely, the value of the home decreases significantly, lowering the insurance premium at the same time.
c.
Since floods happen so infrequently, they are not considered a real threat to the value of the home. Sally’s insurance premium will not be affected.
d.
While extremely annoying, flood damage is usually inexpensive and will not affect the value of the home. Sally’s insurance premium should not be affected.

Answer 1

a. Financial loss due to flood damage is likely. Her insurance premiums will be higher than homes not on the waterfront.

Explanation: Insurers price policies based on the likelihood and potential severity of loss. A flood-prone location increases the probability of claims, so premiums will be higher (and flood may require separate flood insurance).