Three things to know about Flood Insurance
- Everyone lives in a Flood Zone
- 25% of all flood damage occurs outside of high risk areas
- Homeowners Insurance excludes claims for flood damage
Flood is defined as rising ground water on normally dry land (Not a broken pipe in the house). This could come from heavy rain, overflow of stream, lake, river or ocean, tidal surge, water main break, blocked drainage ditch, swimming pool collapse or other causes. Most homes outside of high risk flood zones do not have flood insurance as the bank does not require it, but 25% of the claims happen in these lower risk areas. Unfortunately most people find out too late that home insurance excludes coverage for flood damage.
Most people that buy flood insurance purchase a policy that is administered through FEMA (Federal Emergency Management Agency). This program was set up under the National Flood Insurance Act of 1968. The NFIP (National Flood Insurance Program) provides limited coverage in the event of flood damage. Coverage and cost depends on if the home is your primary home (you live there 80% or more) or a secondary home (you live there less than 80%), your Flood Zone, where the lowest floor is in relation to the Base Flood Elevation, and several other factors. Families with multiple homes may have a problem reaching the 80% at any location. An NFIP policy will allow you to purchase up to $250,000 in coverage on the building and up to $100,000 in coverage for your personal property (contents). With almost 40% of the homes in the US valued at over $250,000, an NFIP flood policy may not protect your home in the event of a catastrophic flood. If you live in the home 80% or more (Primary home) the policy will provide Replacement Cost for the building. Your personal property is only covered for Actual Cash Value. This means the claim payment will be reduced based on the age of the item (depreciation). This can create a large gap between what it would cost to replace your personal property and what the policy will pay. If you live in the home less than 80% of the year, the building is also only covered for Actual Cash Value (depreciation). The next item you have to worry about is where will you live while the home is being repaired. If this is a secondary home you have options, but if this is your primary/only home you will need to rent a location. Unlike your home insurance policy which provides reimbursement for Additional Living Expenses if you need to live elsewhere during the repair of a covered claim, an NFIP policy does not include this coverage. In the event of flood damage, you are on your own to pay for additional housing (while you continue to pay your mortgage, taxes and insurance). In addition, if part of your home is below ground level the policy provides extremely limited or no coverage for personal property and building items (paint, flooring, cabinets, etc.). It may appear that you have flood insurance issued by your home insurance company. The NFIP allows insurance companies to put their name on the policy (“Private Label”), but it is still an NFIP policy with the same limitations. All claims are processed through the NFIP, not your insurance company. Also, if you have a guest house or a garage with living space, that building needs its own policy.
Your second option, Private Flood insurance is designed, written and administered by an insurance company. These policies provide broader coverage and higher limits. Most brokers either do not know about or do not have access to Private Flood Insurance options. That is why you do not hear about it. Since the start of the NFIP, the rates have been subsidized. The premiums for homes in high risk areas were kept artificially low while being subsidized by homes in low risk areas. The NFIP is about $25 billion in debt. As NFIP flood policy premiums increase, Private Flood is looking more attractive. NFIP Flood premiums for secondary homes are increasing at a greater rate than primary homes. This makes Private Flood even more attractive for secondary homes. With many secondary homes close to water, it is important to remember that an NFIP policy does not cover replacement cost on the building for a home that you live in less than 80% of the time.
Key advantages of Private Flood
- Higher limits for Building and Contents coverage available
- The ability to have Replacement Cost on the Building and Contents
- Ability to purchase Loss of Use (expenses to live elsewhere during repairs) or Business Income (Rent reimbursement for Rental Property)
- Better coverage for Building and Contents for below ground and basement areas
- Reduced or no waiting period (NFIP has 30 day waiting period, unless a new loan is involved)
- Coverage for Other Structures (garage, shed) available without reducing primary building coverage
- The premiums could be lower since they do not have to accept all properties and use complex underwriting tools to set accurate premiums
Your third option is Excess Flood Insurance. This policy would provide coverage after you have exhausted the benefits on either an NFIP or Private Flood policy. The policy would require you to have at least $250,000 in coverage for the building and $100,000 in coverage for contents. If a major loss occurred, many homes would require more than $250,000 to replace the building and $100,000 to replace contents. This is important coverage to ask about, specifically if you only have an NFIP policy. Excess Flood Insurance can provide coverage up to $50 million for a building, $2 million for contents and $500,000 for Additional Living Expenses or Business Interruption.
This article was not designed to make you a flood expert or answer all questions on flood insurance. There are just too many questions. It is designed to make you aware that there are options and to start the conversation. If you live near water, if you live in a valley or flat ground, start a discussion with your insurance advisor to discover the options. The more information you have, the better risk management decision you can make to financially protect yourself. Flood insurance may cost as little as a few hundred dollars a year.
For more information on fee based risk management of personal property and casualty policies, email BBoak@BOAKS.com
Brian P. Boak, Private Client Risk Manager, P&C Accredited Estate Planner®, Chartered Private Risk and Insurance Advisor, CLU®, LUTCF
BOAKS Advisors Analyze – Advise – Protect