Flood Insurance: Liability, Programs, Costs & More
November 4, 2020
What is Flood Insurance, & Why Should You Buy It?
The description of a flood for understanding flood insurance is when an overflow of water submerges typically dry land. Among severe weather-related disasters, floods are the most frequent and prevalent natural events. And because floods cause billions in losses, they are the most expensive natural disasters annually.
The National Severe Storms Laboratory classifies floods by their sources, including river floods, coastal floods, storm surge, inland floods, and flash floods. Regardless of origins, when there is a potential that water will rise unexpectedly, flood insurance is always advisable and often required as with federally backed mortgages properties in federally designated flood zones. As with any insurance, it is too late to purchase flood insurance after the fact, and sometimes even in advance of impending disasters such as hurricanes.
Flood insurance coverage is a form of property insurance that protects dwellings, property, and commercial properties against losses due to surges from a coastal storm, extensive heavy rain, melting snow, overflow of storm drainage systems, and levee and dam failures. Protection from flooding requires purchasing flood insurance separately because standard home insurance policies do not cover flooding losses.
Most flood insurance policies are sold by insurance agencies who work through the National Flood Insurance Program (NIFP.) Because of the backing by the NFIP, flood insurance policy rates do not vary between insurers. Private flood insurance is a relatively new concept. The federal government does not administer it. They usually cost more than NFIP plans. They offer the option for the coverage to be purchased in installments and can go into effect without waiting. Another distinction is buying replacement costs for personal items instead of the lower actual cash value feature NFIP backed plans provide. Unlike NFIP plans, private insurers can cancel policies after making payouts.
Who Needs Flood Insurance?
The National Flood Insurance Act (NFIA) of 1968 and Flood Disaster Protection Act (FDPA) of 1973 created flood insurance requirements for lenders. Homeowners who live in flood plains designated by the NFIP as Special Flood Hazard Areas (SFHA) must buy flood insurance. For instance, flood insurance is a requirement for a homeowner with a federally backed mortgage, such as an FHA loan, who lives in a high-risk flood zone.
The fact that 20% of flood claims occur in areas that are not considered high risk makes purchasing flood insurance a wise decision for low-to-moderate risk areas not under a mandate to buy it. Consider that a flood insurance policy is the only option to protect insureds from unforeseen flood-related costs. The federal government provides disaster relief to victims of floods with low-interest loans, but they come with the stipulation that the borrower pays back in full.
Statistics from the Insurance Information Institute show nearly 90% of homeowners in the U.S. do not have flood insurance, which leaves them responsible for the costs of repairing extensive damage or rebuilding in the case of a total loss due to flood-related disasters. The stats indicate that many homeowners and businesses are at risk from flooding and benefit from a relatively low-cost flood insurance program to cover them against potential severe losses.
Given the severe weather patterns and intensity of hurricanes and storms in recent years, now is an excellent time for homeowners and businesses to review their flood insurance needs. They may not realize they are at greater risk than at previous times and that they are without any protection to help them recover from losses should flooding occur on their property.
Flood Insurance Basics
The following section of this flood insurance guide provides more details on how flood insurance works and helps agents and brokers understand the nuances of providing flood insurance for their customers.
What Does Flood Insurance Cover?
Any residential or commercial property owner can purchase a flood insurance policy to protect against losses caused by water damage, specifically due to flooding. The list of items a flood insurance policy covers is broad.
Electric and plumbing
Central air conditioner
Heat pump and sump pump
Cistern including water in it
Fuel tanks and the fuel in it
Solar energy equipment
Water tank and pump
Refrigerator and food in it
Range and stovetop
Freezer and food in it
Washing machine and dryer
Window air conditioners and freezers
Carpeting and window treatment
Carpeting over an unfinished floor
Carpets over wooden floors
Window blinds and curtains
Permanently installed paneling, wallboard, bookcases, and cabinets
Foundation walls, anchorage systems, and staircases attached to the building
Detached garages used for limited storage or parking are eligible for up to 10 percent of the total building coverage. The full amount applied subtracted from the total coverage amount for the building.
Personal property (not stored in a basement):
Valuables such as original artwork and furs, up to $2,500 in value
Damage from a sewer backup is covered but only in cases where it directly results from flooding.
What Does Flood Insurance Not Cover?
NFIP-backed flood insurance is a Federal Emergency Management Association (FEMA) program. Anyone living in one of the 23,000 participating NFIP communities who meet the eligibility for flood insurance requirements and who is also not affected by the numerous exclusions is qualified for flood insurance.
According to the NFIP, flood insurance does not cover damage or loss to the following items:
Damages of moisture, mildew, or mold caused by a property owner's avoidance or neglect or are not attributable to a flood
Damage because of earth movement, even in cases where a flood is the earth movement's causes
External property, including wells, septic systems, swimming pools, hot tubs, decks, fences, patios, walkways, and landscaping
Damage to finished basements
Additional living expenses for temporary housing while the insured building is either under repair or unsuitable for occupancy
Loss of use or access to the insured property
Business interruption causing financial losses
Property and belongings outside of an insured building, such as trees, plants, wells, septic systems, walks, decks, patios, fences, seawalls, hot tubs, and swimming pools
Financial instruments, including currency, precious metals, and stock certificates
Automobiles, motorcycles, and self-propelled vehicles, including related parts
Damages and losses that occur within the policy's first 30 days
Damages that exceed NFIP policy limits
Flood Insurance Limits
Federal flood insurance maximum coverage limits for personal residences are:
Building Structure: $250,000
Personal Property: $100,000
Valuables and Business Property: Up to $2,500 for fine art, collectibles, furs, jewelry, and business property combined
Additional Living Expenses: No coverage
Policies with lower limits are available
Higher coverage limits are available for policies for nonresidential structures and their contents.
Federal flood insurance maximum coverage limits for commercial operations are:
Up to $500,000 per building or structure on the property
Policy limits coverage to one building or structure on the property
Multiple buildings or structures on a commercial property each need a separate flood insurance policy to be covered
NFIP Flood Insurance Deductibles
NFIP standards govern flood insurance deductibles. NFIP policies can include discounts of up to 40% off flood insurance premiums, depending on the building and contents deductibles.
Flood Insurance Requirements
According to Floodsmart.gov, if you live in a high-risk flood area and have received federal disaster assistance – including grants from the Federal Emergency Management Agency (FEMA) or low-interest disaster loans from the U.S. Small Business Administration (SBA). Then you must maintain flood insurance to be considered for any future federal disaster aid.
Types of Flood Insurance
Residential – covers homeowners – including condominiums and townhouses – for flood-related losses to home's structure and belongings
Commercial – covers individual buildings and structures on a commercial property, including foundation, electrical and plumbing, finishings, equipment, furniture, inventory, and more
Renter – covers up to $100,000 for contents including furniture, clothes, television, computers, rugs, artwork, and more
Excess flood insurance – for property values above $500,000, additional coverage is available by purchasing a private flood insurance policy
Private flood insurance – private carriers operate independently of the NFIP and are not bound by the FEMA requirements. They can offer limits for $1 million, and higher and buyers can shop them as the government does not set premiums. They can also include coverage for additional living expenses, pool and spa repair and fill detached structures, and business income.
How to Buy Flood Insurance
Flood insurance is sold by insurance companies and by insurance agents. They are the same resources that sell home, auto, and business insurance with policies administered and underwritten by FEMA through the NFIP. Additionally, coverage is available through the Write-Your-Own (WYO) Program. The Insurance Risk Management Institute says this information about the WYO program.
WYO is a program that allows participating insurers to issue NFIP flood insurance policies, in contrast to policies issued directly by the NFIP. WYO insurers write the coverage on their own "paper," but the NFIP reinsures 100 percent of the coverage. Regardless of whether NFIP or a WYO insurer issues the policy, the coverage provided is identical. WYO insurers employ the same policy terms that are included in policies issued directly by NFIP. Most flood insurance policies are written via the WYO program.