Flood Insurance: The Homeowner’s Guide

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    Water is so vital to our lives that it is celebrated in nursery rhymes, poems and popular music, but when water damages or destroys our homes, there is nothing romantic about it. Even less romantic is the fact that flood damage is not covered by standard homeowners insurance. There is hope, though, in the form of National Flood Insurance.

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      Why doesn’t homeowner’s insurance cover flooding? Private insurers generally do not cover flooding because the numbers don’t add up. Insurance is a matter of math, where the risk is spread across a large enough pool that there are more people paying than collecting.

      With flooding, the number of people willing to pay for the added coverage will not pay enough in premiums to cover the amount of money they can expect to pay in claims. That means they will lose money on the proposition.

      The term insurance industry uses is “Adverse Selection” which means not enough is going to come in to cover what is going out. Adverse selection keeps most insurers from offering flood insurance but there are exceptions. Some insurers offer private flood insurance; others offer supplemental flood coverage to policyholders that are part of the National Flood Insurance Program.

      What does flood insurance cover?

      Not all water damage is considered a “flood,” even if it fills your basement.

      As with all insurance, it is important to understand what is and isn’t covered by your policies. Flood insurance does not protect you from things like burst pipes, leaking appliances, stopped up sinks, broken toilets or landscaping gone bad.

      Flooding is defined by the National Flood Insurance Program (NFIP) as a temporary overflow of water on normally dry land brought on by landslides, hurricanes, earthquakes or other natural disasters. Generally, flood insurance covers the following items:

      • Your home and its foundation
      • Electrical and plumbing systems
      • Furnaces, central AC equipment, portable AC units and water heaters
      • Built-in appliances such as dishwashers, refrigerators and stoves
      • Wall-to-wall carpeting and other carpets
      • Permanently installed paneling, wallboard, bookcases and cabinets
      • Window blinds and curtains
      • Detached garages; though other detached buildings require a separate policy
      • Debris removal
      • Your personal belongings: clothes, furniture and electronic equipment
      • Portable microwave ovens and dishwashers
      • Washers and dryers
      • Freezers and any food in them
      • Expensive belongings such as artwork and furs (up to $2,500)

      Flood insurance does not, however, cover the following:

      • Any damage caused by mold or mildew that the insurer determines could have been avoided by the homeowner
      • Precious metals, currency, and valuable papers such as your mortgage or stock certificates
      • Your landscaping: trees, bushes, patios and walkways, fences, hot tubs and swimming pools
      • Living expenses, such as hotel costs while your home is being repaired or rebuilt
      • Cars and motorcycles
      • Any financial loss you incur as the result of flooding on your business

      NFIP coverage is generally limited to $250,000 for residences, $100,000 for personal possessions and $500,000 for a commercial property. Excess flood insurers offer coverage in excess of the NFIP limits. This means that if your home is worth $500,000, not including the land, you can purchase an additional $250,000 of excess coverage to compensate you in the event your home is completely destroyed by a flood.

      Do I need flood insurance?

      Flood insurance is worth considering, no matter where you live. Even if you don’t live in a flood zone, you are five times more likely to experience flooding than a fire in your home over the next 30 years, according to the Federal Emergency Management Agency (FEMA).

      To find out if you are in an area that is likely to flood (called a designated flood zone or flood plain), you can ask your insurance agent or go to FEMA’s Flood Map Service Center, which allows you, in most cases, to input your address and access a map that indicates the likelihood of flooding at your home.

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      The National Flood Insurance Program

      Prior to 1968, homeowners who lived in flood prone areas were on their own. Congress acted in that year to create the NFIP to provide government-issued insurance against losses due to flooding. The program was offered to communities in known flood zones to fill in the gap that was not covered by private insurance.

      In 2012, Congress passed the Flood Insurance Reform Act of 2012. The law is intended to make the NFIP “more sustainable and financially sound over the long term.” The law eliminates some rates that were considered artificially low; some policyholders saw a 25% annual increase in premiums. Policyholders hit included:

      • Owners of homes that were neither primary or secondary residences that are in a Special Flood Hazard Area (SFHA)
      • Property owners that had experienced severe or repeated flooding
      • Owners of business properties in a Special Flood Hazard Area

      The annual premium increases for these policyholders continued until their rates reflected their true risk. Owners of primary residences located in SFHA zones continue to pay subsidized rates until:

      • A lapse in coverage occurs
      • The property is sold
      • Severe, repeated flood losses occur
      • A new policy is purchased

      Types of flood insurance

      The National Flood Insurance Program (NFIP) does not offer coverage to every property in the country. NFIP only covers properties in participating communities. A community that is located in an identified floodplain must apply for and agree to participate in the NFIP. If a community does not meet the requirements for participation, no one in that community will be able to purchase flood insurance through the program.

      The other type of flood insurance is private flood insurance – generally offered only to properties that are not eligible for the federal program. The companies that do offer flood insurance usually have relatively low limits, especially when you consider the fact that a major flood can completely destroy a building. Common limits are in the $250,000 range.

      Hurricane insurance

      if you assume your homeowner’s policy and riders covering hurricanes, earthquakes or vandalism cover the damage from water, you would be wrong. In each of these scenarios even though the flooding was the result of an insured risk, the damage from the water is excluded.

      Unlike flood insurance, hurricane insurance is provided by private companies but presents some potentially tricky issues for you to consider. When it comes to hurricane coverage, careful reading and understanding is required to make certain you’re protected. Most homeowner’s policies protect against hurricane damage, but this is where things get complicated. The question is: What constitutes damage from the hurricane?

      What is hurricane damage?

      Hurricane and tropical storm damage for the purposes of homeowner’s insurance is limited to the damage caused by the wind directly and indirectly and does not cover direct or indirect water damage.

      Aren’t wind and water both parts of a hurricane? They are, but only wind damage is covered. The difference is, if your home is blown off its foundation by hurricane winds, you’re covered. If it is washed off its foundation by a storm surge, you aren’t. If a tree next to your house is blown down by the wind and crashes through your roof, you are covered. If a storm surge knocks down the tree and it crashes through your roof, you aren’t.

      The tricky part for many homeowners when dealing with post hurricane claims is getting the insurance company to pay for wind damage that they assert was caused by water.

      After Katrina, many coastal community homeowners spent years fighting with insurers about whether the wind destroyed their homes before or after the storm surge. Timing was the determining question of whether they were covered or not. This was particularly true for the majority of homeowners who did not have flood insurance and were exclusively at the mercy of their homeowner’s policy.

      Special rules

      While hurricane coverage is usually part of your homeowner’s policy, there may be special rules that apply to hurricanes that differ from the rest of your coverage. These rules usually apply to high risk coastal communities and generally pertain to deductibles.

      Your homeowner’s policy as a whole, for example, may have a $500 deductible which means that the first $500 in damage is paid by the policyholder; the insurance would cover the rest of the balance. Insurance companies often have separate deductibles for hurricanes and not understanding this can be quite costly in the event of a hurricane.

      Special hurricane deductibles can be a percentage of your home’s value rather than a straight dollar amount. For example, the hurricane deductible might be 5% of your home’s value at the time of a storm. That means a $300,000 home has a deductible of $15,000 for hurricane damage instead of their normal $500 deductible.
      In high risk areas some insurers exclude hurricane coverage altogether and require that an additional premium be paid in order to add it to the policy. Others that provide hurricane coverage as a standard part of the policy but have a higher percentage-based deductible may require a higher premium to lower the deductible.

      Average cost of flood insurance

      The average flood insurance annual premium in the U.S. is roughly $700, but as you might imagine, the cost of flood insurance varies greatly depending on where you live. In general, premium costs are lower in areas where flooding is common because there is a wider pool of homeowners who have flood insurance, so the company is taking in more money in premiums. The average claim paid out to homeowners in 2018 was a not-insignificant $42,580.

      Average flood insurance premium rates by state

      StateYearly flood insurance premium
      New Hampshire$1,060
      New Jersey$961
      New Mexico$843
      New York$1,155
      North Carolina$814
      Rhode Island$1,389
      South Carolina$672
      South Dakota$931
      West Virginia$1,104

      How to save money on flood insurance

      Reducing the impact of high rates can, in some cases, be accomplished by making structural changes to your property. For instance, you can add foundation vents that open to release flood water from crawl spaces, relieving pressure and mitigating damage.
      Another potential low cost way to lower flood insurance premiums is having your home’s elevation re-certified. This option is only viable if you suspect your home was improperly measured in the first place. This can happen if you are not the original owner or if the elevation was never certified.

      Some people will go so far as to relocate their home to higher ground on their property. While a relocation to higher ground is a major expense, if the difference in elevation is significant enough, it can mean the difference between flooding and not flooding. Another option is elevating your home above the likely flood levels. Raising your first floor three feet above the base flood elevation can save 60% or more on flood insurance costs.

      It may take some effort, but if you can get your community leaders on board with FEMA’s Community Rating System, you may save up to 45% on flood insurance. Communities earn points for 19 activities, from publicizing the FEMA Flood Insurance Rate Map to having local real estate agents advise purchasers of any flood hazards. Earning enough points qualifies community members to anywhere from 5-45% off their annual premiums.

      Lastly, consider private flood insurance. Homeowners who live in a Special Flood Hazard Area (SFHA) may be able to get a cheaper policy through a private insurer to satisfy their mortgage holder. These policies may provide higher coverage levels or broader coverage than the NFIP, as well. You’ll want to shop around, though, to find a company that is financially stable with a good record of paying out on claims.