What You Should Know About Flood Insurance

Is flood insurance right for you?

May 23, 2019

You’ve probably heard this horror story before — someone loses a home due to a flood and learns after the fact that standard homeowners insurance doesn’t cover flood damage.

Because very few companies offer flood insurance, the U.S. government created the National Flood Insurance Program (NFIP) in 1968. Available to homeowners, renters and business owners, this insurance often is required to obtain a mortgage in areas at high risk of flooding. Recently, more private insurers have started offering flood insurance as well, which has created an alternative to the NFIP.

Even if you don’t live in a flood-prone area, you might want to look into a policy just for peace of mind. According to the NFIP, nearly 25% of the program’s claims occur in moderate- to low-risk areas. Check out the questions and answers below to help determine if flood insurance is right for you.

National Flood Insurance Program (NFIP)

To participate in the NFIP, a community must adopt and enforce a floodplain management ordinance with rules regarding construction in certain flood-prone areas. In exchange, the government makes flood insurance available within that community. Visit http://www.fema.gov/national-flood-insurance-program(opens in a new tab) for more information.

What does flood insurance cover?

The NFIP provides coverage for both the structure and its contents. Coverage for contents is optional in some cases, so you may want to give us a call to discuss other coverage for your personal property. Keep in mind that you typically can’t purchase flood insurance and have it take effect the next day. There is usually a 30-day waiting period. (Exceptions to this rule apply, however, particularly when the insurance is required by a lender and is purchased during the process of securing a mortgage.) If you think you need flood insurance, don’t wait to buy a policy!

What doesn’t it cover?

Generally, government-issued flood insurance will not cover the following: Buildings entirely over water or principally below ground, gas and liquid storage tanks, animals, aircraft, wharves, piers, bulkheads, growing crops, shrubbery, land, roads, machinery or equipment in the open and most motor vehicles.

How much does flood insurance cost through the NFIP?

As with all insurance policies, the cost of flood insurance varies depending on your situation. If your home or business is in a high-risk area, such as a Special Flood Hazard Area (SFHA), your premium naturally will be higher than a home or business in a low- or moderate-risk zone. Premiums are based on how old the building is, how many floors it has, the location of its contents, your deductible and more. Renters insurance is typically less expensive, as renters generally insure their belongings and not the building.

Private flood insurance

Like an NFIP policy, private flood insurance covers(opens in a new tab) the structure of your home and its contents from water damage caused by a flood. If you live in an SFHA, you may be able to purchase flood insurance through a private insurer to satisfy federal mandates and mortgage requirements. The major disadvantage of the private flood insurance option is the risk of dealing with a longer claims process, or having your claim denied due to circumstances beyond your control—such as the company not having enough funds to deal with a disaster. Unlike the taxpayer-funded NFIP, a private flood insurer is a for-profit company that either relies on a reinsurer or on money collected from premiums to pay out damages to claimants.

Should you use a private flood insurance company?

We recommend you obtain quotes from several sources, both private and federal, and compare the cost of premiums, increased or additional coverage options and the stability of the insurer. Look up the company's rating through such ratings agencies as A.M. Best or Fitch, or ask the insurer.

What are the advantages of private flood insurance?

In addition to being less expensive in some cases, policies provided by the NFIP typically have a maximum coverage of $250,000 for the structure of your home and a $100,000 on your possessions. In many cases, private insurers can provide you with much higher limits of coverage.

Another key advantage of private flood insurers is that they provide coverage for a greater number of possessions, including furs, jewelry, fine art or collectibles that could be damaged by flood waters. The NFIP lumps all these items into a single category, and only pays up to $2,500 in damages. A private flood insurer may be able to cover each of these items separately, up to much higher limits. Private flood insurance may also pay for living expenses in the event your home becomes uninhabitable.

What are disadvantages of private flood insurance?

The biggest risk is that the companies offering private flood insurance are largely untested by major disasters. Until 2014, private flood insurance was extremely rare. While it still represents only a sliver of total flood policies, private insurance is becoming more popular due to new regulations that have helped companies gain wider acceptance. However, until more data is available on the performance of these companies, consumers will be taking on a higher risk with a private flood insurer than they will with the federal program. In fact, some mortgage companies are unwilling to accept private flood insurance.

Where can I find more information?

The NFIP website http://www.fema.gov/national-flood-insurance-program(opens in a new tab) has plenty of answers on the NFIP program.  You can also give us a call to help you navigate the complexities of these two flood insurance options to ensure you get the right policy for your individual situation. 

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