The Ultimate Guide to Understanding Flood Insurance for Your Property
A flood is defined as “a general and temporary condition where two, or more, acres of normally dry land or two or more properties are inundated by water or mudflow.” This legal definition governs the government-funded National Flood Insurance Program, or NFIP. In 1968, this program was established because the most common natural disaster in the United States is flooding. Private insurance companies do not possess sufficient resources to cover the costs associated with cataclysmic flooding.
Many events, man-made and natural, can result in flooding of residential and commercial property including rainfall, tidal surge, over-topped levees, clogged drainage systems, cloudbursts and dam failure. Spring weather conditions increase the flood risk as upstream snow melt drains into communities at lower elevations. Property owners must consider the surrounding area when studying flood-hazard maps that rate each area for the degree of flooding risk.
PRIMARY REASON FOR FLOOD INSURANCE COVERAGE
Standard homeowner’s insurance will not pay for flood damage to a building or its contents. Adjusters are trained to look for signs of the entry point of water. Lenders can require the homeowner to carry sufficient flood insurance on the structure as a prerequisite for mortgage loan approval. Properties outside the flood plain will be affected when flood waters come. Owners must consider the upstream threats that exist to the property. A dam that is 50 miles away can send torrents of water downstream. Wildfires create new threats to properties that were not in the flood-risk areas before the fire.
FLOOD INSURANCE ADMINISTRATION
The Federal Emergency Management Agency, or FEMA, is responsible for the administration of the National Flood Insurance Program. More than 90 private insurance companies offer flood insurance policies to people who own and rent homes and commercial properties. Entire communities can qualify for flood insurance if requirements are followed. Floodplain management standards must be implemented to manage the flood risk in the area.
FLOOD INSURANCE COVERAGE DESCRIPTION
All flood insurance policies offer identical coverage at rates that cover the perceived risk of loss. The owner of a house or commercial building will purchase flood insurance that covers the structure. The land under the building is not covered in the flood insurance policy.
• Structure flood insurance covers:
o The building and the foundation underneath
o Electrical and plumbing systems
o HVAC equipment – air conditioners, furnaces, boilers and water heaters
o Major appliances – Refrigerator, stove, dishwasher
o Carpeting installed permanently over the unfinished floor
• Limited basement insurance covers:
o Basement insurance is limited in all areas below the lowest elevated floor. Date of construction and flood zone affects the coverage for:
Crawl spaces under the first floor
Enclosed areas that are considered “walkout basements”
Enclosed areas under other elevated buildings
Owners, and renters, must consider the importance of carrying sufficient flood insurance on the contents of the building. The building owner’s flood insurance policy will not cover the renter’s possessions inside the flooded building or house.
• Contents flood insurance covers:
o Clothes, furniture and electronic equipment
o Curtains and other decorative furnishings
o Portable appliances – window air conditioners, microwaves and dishwashers
o Carpets not covered in the structure insurance
o Washer and dryer
• Flood insurance does not cover:
o Mold, mildew and moisture damage that could have been prevented by the property owner
o Precious metals, currency or stock certificates
o Landscaping features, such as trees, wells, septic systems, decks, fences, patios, sea walls, hot tubs or swimming pools
o Living expenses for temporary housing
o Financial losses caused when the flood interrupts business and causes a property to be unfit for use
o Self-propelled vehicles – cars, trucks, farm equipment or recreational vehicles
Policyholders must beware of the difference between Actual Cash Value, or ACV, and Replacement Cost Value, or RCV, clauses in the policy documentation. Replacement Cost Value is essential to ensure sufficient insurance exists to return the property to its original condition. Primary residences are insured to within 80 percent of the building’s replacement cost.
Other structures and the contents inside are assigned an Actual Cash Value, which is the RCV when the loss occurs minus physical depreciation. Personal property covered with flood insurance is valued with the ACV.
DEFINITION OF HIGH-RISK AREAS
Congress requires all lenders backed by various federal mortgage insurance programs to require mortgagees to carry flood insurance policies on all properties located in the designated high-risk flood areas. This action protects the lender against loss if a flood damages the mortgaged-backed property. Federal guidelines were established to determine the best rating system for existing and new properties.
• High-risk areas – Residential and commercial property located in an area where the chance of flooding in a calendar year exceeds one percent is considered at high risk for flooding. During a 30-year mortgage, the property has a 26 percent chance of experiencing a flood.
• Moderate-to-low-risk areas – Property in this area does not have to be covered under the NFIP. Carrying flood insurance is wise since floods can happen anywhere that rain falls. Owners outside the high-risk areas will file more than 20 percent of NFIP claims. In addition, one-third of all disaster assistance for flooding is provided to these property owners. Disaster assistance is a loan that must be repaid to the federal government with interest.
FLOOD INSURANCE BASICS
Owners of houses and business property must be aware of the location of the floodplains in the area surrounding the property. Too many people simply seek standard property insurance policies that cover essentials. Saving a few hundred dollars each year can be a financially devastating choice if a 100-year flood occurs. Research is essential for protecting against the risk of property loss.
Basic terms concerning flood insurance arms the seeker with important information to guide the search.
o Flood insurance agent – The federal government does not sell flood insurance directly to a property owner. Local insurance agents are available if the owner contacts NFIP at (888)379-9531.
o Coverage – All flood insurance policies will have documentation that provides details about the property that is insured and under what circumstances. Wise property owners will read the coverage statements prior to signing the contract. Changes made to the policy must be accompanied by updated policy documentation from the insurance company and NFIP.
o Deductible – The policyholder is responsible for a set amount of the claim, which is called the deductible. Separate deductibles are on the structure and contents. Multiple losses occur when floods happen, so the policyholder must be able to afford all of the property insurance deductibles including those on auto insurance policies.
o Mandatory requirements – Property owners who carry mortgages will be required to carry sufficient flood insurance coverage if the property is in a high-risk flood area. Significant events that change the landscape, such as hurricanes, tornadoes, wildfires and river course changes, can change the flood risk rating on a property.
o Flood insurance rates – The NFIP insurance costs are set by the federal government and do not vary between insurance companies. The flood insurance rates are based on a number of factors including the date and type of construction of the structure and the risk level for the area. Policy premiums include the ICC Premium and Federal Policy fee. Communities that participate in the Community Rating System, or CRS, apply recommended flood-reduction methods. The property owners in the area are rewarded with significant discounts: up to 45 percent on high-risk areas and up to 10 percent on moderate-to-low risk areas.
o 30-day waiting period – Property owners must realize that the 30-day period is an important factor when major events change the area. Some exceptions apply to this rule:
• Flood insurance is part of a mortgage deal
• Flood map revisions have changed the property designation and the owner purchases flood insurance within the first 13 months
• A lender determines that the property should have flood insurance for the loan to be approved
• Additional flood insurance is purchased on the renewal bill
o Annual premium payment – The NFIP requires that the entire annual premium be paid in advance. Credit cards including American Express, Discover Card, Visa or MasterCard are accepted.
o Elevation certificates – This certificate documents the elevation of the lowest floor of the house or building with respect to the surrounding ground.
• An elevation certificate will be required if the structure was built after the initial Flood Insurance Rate Map, or FIRM.
• Property owners should ask the insurance agent if the structure is considered Pre-FIRM or Post-FIRM before the elevation certificate is purchased.
• Communities that participate in the Community Rating System retain copies of the elevations certificate. Property owners can acquire a copy of the certificate there.
• Any property owner can purchase an elevation certificate for a property regardless of the flood risk rating.
• Flood insurance premiums can drop dramatically in response to the elevation certificate.
FLOOD INSURANCE-RELATED QUESTIONS FOR THE AGENT
Property owners should be diligent in learning every possible detail about the flood insurance policy. Reputable insurance agents will answer every question with substantiated information that can be seen in the policy documentation. General answers can cause problems after a claim is filed.
o What is the flood risk rating on the property?
o Is flood insurance required? Or recommended?
o Does the property qualify for a Preferred Risk Policy?
o Does this community participate in the NFIP Community Rating System?
o What are the recommended coverage levels for the structure and contents?
o What premium discounts apply for this policy?
o What fees are applied to the annual flood insurance premium?
o How does Replacement Cost Value and Actual Cash Value affect the reimbursement amounts for this property?
o Who do I contact if a flood occurs?
BETTER SAFE THAN SORRY
Property owners are wise to consider the possibility of flooding in the area. Few places exist where there is no potential for some level of flooding. A couple of inches of water can be devastating for the residential or commercial property. Water makes new channels that can affect untouched areas in previous floods. Consideration must be given to the ability to recover from a flood. The choice to carry flood insurance might be wise for the first-time property owner.