Lessons From the Floods

Homeowners in the Midwest can teach us all how to cope with financial disaster.

For three weeks the rain poured down, swelling the rivers and lakes that punctuate the Midwest. And then all hell broke loose. Rivers rushed over their banks, dams collapsed, and houses split in two.

On June 12, in Cedar Rapids, Iowa, 5.5 inches of rain inundated the town. The Cedar River crested at 32 feet, destroying homes and businesses and saturating land well past the 500-year flood mark, a level so far-reaching that there's only a 1-in-500 chance of such damage in any given year.

In Janesville, Wis., the parking lot of the United Way morphed into a pond filled with hundreds of stranded carp from the Rock River.

When the water began to recede in late June, people returned to check on their waterlogged homes -- and to call their insurers. They quickly discovered that the floods were shaping up to be as devastating to personal finances as they were to the land.

Homeowners insurance doesn't pay for flooding, and the vast majority of people whose homes were destroyed didn't have specialized flood insurance. Plus, even people who were covered soon learned that there were limitations. So most of the victims have found themselves poring over their policies to wring out every drop of coverage, cobbling together federal and state assistance, dipping into emergency funds or going into debt -- and, in many cases, waiting to see what their final settlements will be.

Will Patience Pay Off?

Guy Patterson's family was in town to celebrate the high school graduation of his son, Jordan, when the rain began to fall in North Freedom, Wis., a rural village just south of the Wisconsin Dells, a popular vacation destination. At 4 a.m. on June 9, his neighbor came knocking, begging for help to sandbag her house.

Guy, Jordan, and Guy's girlfriend, Nancy Walsh, stacked bags for the next few hours in what turned out to be a futile effort to hold back the nearby Baraboo River. When 5 feet of water eventually poured into the neighbor's house, the group switched over to Patterson's house.

They moved all the furniture to the second floor, loaded a minivan with clothes and paperwork, and drove the van to the top of a hill. Patterson and his nephew sandbagged and traded off with Jordan to run a pump. "We figured this was our Alamo and we'd defend it," he says.

When they heard a strange noise and saw that the foundation wall was bowing, they knew they had been defeated. "I looked at my nephew and said, ÔLet's get the pump and get out of here,'" says Guy. "Something bad is about to happen."

Water burst through the sandbags, and the basement wall caved in. By midnight, they had lost the house. "The top stayed in place, but the whole foundation collapsed," says Guy.

The next day, he defied the emergency-response team to navigate a boat through 3 feet of water and rescue a few personal items, including a soggy picture of Nancy's grandmother. The family's furniture and valuables remained on the second floor of the house, which was teetering over the broken foundation.

Guy, Nancy and Jordan all crammed into a hotel room paid for by Guy's employer, Milwaukee Valve. And then they did something few other flood victims were able to do -- waited for the insurance adjuster. "We were one of two people in the area who had flood coverage," says Guy.

He had bought a policy from the National Flood Insurance Program after a record 100 inches of snow fell in Wisconsin last winter. When the snow melted and the floods didn't come, "we figured we had wasted the money." But Guy decided to keep the policy, which cost $342 per year and provided the maximum $250,000 of coverage for a dwelling and $100,000 for possessions.

When the adjuster showed up four days later, he turned right around and left because the house was still underwater. "He told us he'd come back in a week," says Guy. "We were pretty nervous." Meanwhile, he and Nancy finally found a contractor who agreed to shore up the wall while they waited for the go-ahead from the insurer.

Even as they cooled their heels, their neighbors received a check from the Federal Emergency Management Agency for $28,800, the maximum grant. But because Guy had insurance, he wasn't eligible for FEMA assistance, other than $820 total for living expenses. So he continued to wait.

On June 20, 11 days after the foundation wall collapsed, the adjuster finally looked at the house and told Guy and Nancy to call the water-cleanup company, gut the house and start working on the wall. But the adjuster couldn't tell them exactly how much money they'd receive until he finished processing his report -- in another four weeks. "We were amazed by the lack of urgency," says Guy. "We'd been living out of the house for three weeks and spiraling into debt."

Ten days later, Guy received a $30,000 advance on his payout: $25,000 for the house and $5,000 for personal property. But even then the delays continued. The check was made out to Guy's mortgage company, which had to put the money in escrow before he could draw on it.

Now, Guy is waiting for an engineering report that could take another eight weeks. When the insurer's engineer saw the extent of the damage, he promised to expedite payment, and the contractor has started work on the house. But Guy still doesn't know how much money to expect. And he's both surprised and disappointed by the delay. "Why is it taking so long?" he asks.

Relief in the Fine Print

John McCormally managed to squeeze a little extra from his homeowners insurance to pay for the water damage to his home in Des Moines. His experience is a lesson that may give relief to other homeowners as well. Let's say your policy includes a sewage-backup rider, which costs only about $50 per year for $10,000 to $20,000 of coverage. The rider will protect you if your sewer backs up or if water gets in because your sump pump stops working. Unlike flood insurance, it will also pay to replace personal property, carpeting and other items in a finished basement.

McCormally, who was married just five days before the rains came in June, thought he had such a rider when he moved from Iowa City to Des Moines last April. During the storm, he crept down to his dark basement after the power failed and heard water rushing into the house. His sump pump had conked out, and water had drenched the carpet -- installed only about three weeks earlier -- and soaked the drywall, paneling and his computer, among other things.

When McCormally called his State Farm agent to submit the claim, the agent's first response was to tell him he didn't have flood insurance. "I told him that my problem wasn't rising rainwater," recalls McCormally, who was sure that the sewage-backup rider would cover the loss.

But the customer representative told him that he didn't have the rider. Apparently, it had been dropped inadvertently when McCormally moved from Iowa City to Des Moines, even though he had asked that all of his coverage be transferred.

McCormally complained to both the company and the agent. Eight days later, State Farm called to tell him that he was covered after all. An adjuster examined the damage and wrote him a check for $10,000. McCormally expects to receive a few thousand dollars more to pay for property losses.

Starting Over -- Again

Thirty years ago, John and Sarah Gibbs and their two young children moved into a farmhouse in Gays Mills, Wis., the so-called Apple Capital of the state. Their 100-year-old Victorian home had four bedrooms and stained-glass windows, with "beautiful wetlands behind the house that connected to the Kickapoo River," says Sarah. "We sometimes had 20 to 30 egrets standing out there in the water."

But five months later, they had 14 inches of standing water in their house. Gays Mills has seen many floods in its 150-year history. "Old-timers say that you just hose out the house and move back in," says John.

With potential water damage in mind, the couple replaced hardwood floors with linoleum and left the stone basement unfinished. And for 30 years they were fortunate. The next big flood didn't materialize until August 2007, when 16 inches of water poured into the house. The Gibbses didn't have flood insurance, but they received a check from FEMA for $3,000.

Last year's flood devastated Gays Mills, and 35 families moved out -- a major blow for a town with just 600 residents. At first, Sarah and John, who is on the local school board, were determined to stay.

But in June, the waters again inundated Gays Mills -- the second major flood in ten months. This time the water stood 18 inches deep in the Gibbses' home and destroyed many of their neighbors' properties. "Everything was covered with mud that dried like cement," says Sarah.

A FEMA inspector showed up soon after the water receded, but the couple were told they were ineligible for assistance (other than $980 for rent). That's because after receiving the check in 2007, they did not buy flood insurance, as FEMA requires to obtain additional assistance. And Sarah isn't sure she wants to rebuild. "We're in our sixties, and there's a world of difference between going through this when you're in your thirties and when you're older."

In fact, the residents of Gays Mills are debating whether they'd like to ask the federal government to help them move the entire town to higher ground, just as nearby Soldiers Grove did after the 1978 floods. Sarah thinks it would be an opportunity to rebuild as a "green" community. "Instead of just being remembered for the filth of the floods, Gays Mills could be an example for the country," she says.

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