Do You Need Flood Insurance?

Homeowners who are at risk of flooding should consider purchasing flood insurance, because homeowners’ insurance doesn’t cover flooding. You can buy federal flood insurance for your home, business, or rental, but only if your community participates in the federal National Flood Insurance Program (NFIP). This requires communities to adhere to floodplain management standards to obtain federal insurance.

In the United States, homeowner insurance policies don’t cover flood damage. Homeowners who want such protection are required to purchase separate flood insurance from the federal government. The federal insurance covers flooding damages that homeowners’ policies don’t. Homeowner policies do cover some forms of water damage, such as water infiltration from a damaged roof, storm-broken window or flooding arising from someone else’s negligence.

Flood insurance covers flooding from rain, storms, hurricanes, flooding bodies of water and even broke dams. Flood insurance is available to both homeowners and tenants. Federal flood insurance covers up to $250,000 of structural damage to your home. 

You can also buy a policy that covers up to $100,000 of personal possession damage. There are two coverage choices for your property and contents: 80% of replacement value or at the current, depreciated value. You can purchase private flood insurance for additional coverage, but you first must buy the federal policy if it’s offered in your community.

Flood insurance covers your home and its foundation, major mechanical systems, appliances, flooring, walls, cabinets, bookcases, window blinds, detached garages and debris removal. Property covered includes damage to furniture, clothing, electronics, curtains, portable appliances, washers/dryers and window air conditioners. 

Basic flood insurance is offered by the federal government. Additionally, private insurers offer supplemental flood insurance policies.

NFIP, administered by FEMA, is the provider of federal flood insurance. The program was created by Congress in 1968 as a response to the growing cost of taxpayer-funded federal flood disaster relief. The program is a consortium of approximately 90 private insurers. You can purchase NFIP through a network of casualty and property insurance agents at rates set by FEMA. These rates depend on the location of the insured property, its age and type of construction. 

Approximately 60 insurance companies participate in a program known as Write Your Own (WYO), which dates to 1983. This program allows insurers, under their own name, to issue NFIP flood insurance and adjust claims on behalf of the federal government. As of 2017, 87% of the federal flood policies were issued under the WYO program. 

Insurance Information Institute (III) statistics from July 2018 found that 69% of flood insurance policies covered single family homes. Condominiums accounted for another 20%, and 5% stemmed from coverage of non-residential and business properties. The remaining policies covered two- to four-family units and other types of housing. 

NFIP instituted a reinsurance program in 2016 to share the cost of flood insurance with private re-insurers. Since then, it has reinsured billions of dollars in claim exposure. In 2018, re-insurers paid $1.46 billion in flood claims after the NFIP paid out claims of $4 billion. 

FEMA issued its first catastrophe bond in August 2018 to transfer flood claim risk to the capital markets. The bond, known as an insurance-linked security, raised $500 million in reinsurance from FloodSmart Re LTD. 

Private flood insurance, called excess coverage, supplements the NFIP for those who want more protection. To get it, you must first buy the basic federal flood insurance if your community participates in the NFIP. Several insurers provide special policies for expensive properties. These policies are available in noncoastal areas and/or as an adjunct to federal flood insurance. 

Your comprehensive auto insurance covers flood damage to your vehicles.

According to a 2016 poll by the IIII, only 12% of U.S. homeowners are insured against floods. For the remaining population, this begs the question of how many mistakenly believe they’re covered by their homeowners or renter’s insurance policies, or by their landlords. In some areas, residents are required to buy flood insurance, but this is the exception.

If you wonder whether you need flood insurance, consider these statistics regarding Hurricane Katrina. The NFIP has paid more than $16.3 billion in flood insurance claims arising from the 2005 storm. Other top NFIP payouts stem from Hurricanes Harvey, Sandy and Irma.

In some high-risk areas (special hazard flood areas) of the country such as flood plains, homeowners are required to secure NFIP insurance if they plan to get a mortgage from a lender that’s insured or regulated by the federal government. A risk area is defined as having a one percent or greater chance of flooding in any given year. Even if your property isn’t located in a risk area, any mortgage lender can insist you buy NFIP insurance before granting you a loan.

If you live in a low-to-moderate risk region, you’re encouraged, but not compelled, to purchase flood insurance. The reason for this recommendation is that 20% of NFIP claims arise from floods outside of high-risk areas. People in low-to-moderate risk areas receive one-third of all flood-related disaster assistance funds. Unlike insurance, disaster assistance funds are loans and must be repaid. There are currently 21,000 communities participating in NFIP – if yours isn’t, you can petition your local government.

You’re required to wait 30 days before your flood policy gains effect. You may be able to waive the 30-day wait if you’re taking out a new or modified mortgage, the map for the property has been revised within the last 13 months, the lender demands immediate coverage, or if you add more flood coverage at renewal time. You’re required to make payment of the annual premium up front. Finally, your lender may require you to provide an elevation certificate, which specifies how close your home is to the ground.