Staying above water: The basics of flood insurance
With a few strokes of his pen, President Obama on July 6, 2012, signed legislation that extends the life of the National Flood Insurance Program for five years. Under the law, the flood insurance program will expire in September 2017; in recent years, the program had been hobbling along under a series of short-term extensions.
Aside from giving the flood insurance program a five-year lease on life, highlights of the law include:
• Raising the cap on annual flood insurance premium increases from 10 percent to 20 percent.
• Imposing minimum deductibles of $1,000 to $2,000 for homeowner’s flood insurance claims.
• Eliminating subsidized insurance rates for properties with repeated flood losses and flood insurance claims.
What is flood insurance?
Now that the future of the National Flood Insurance Program is relatively secure for several years, you may be wondering how the program actually works.
One important item to note is what flood insurance doesn’t do. According to Louis Chiafullo, a partner in the insurance practice at law firm McCarter & English LLP, one of the most common misconceptions about flood insurance is that it’s included in standard homeowner’s policy.
“Many homeowners think it’s a basic part of their coverage,” Chiafullo says. “It’s not.”
Flood insurance is an extra layer of coverage offered through the National Flood Insurance Program (NFIP), which is administered by the Federal Emergency Management Agency (FEMA). In the event of water damage from flooding, the insured homeowner will have coverage up to the legal limits for his or her property.
What does it cover?
According to the NFIP, a homeowner’s flood insurance policy covers up to $250,000 in structural damage and up to $100,000 in content losses. A business policy covers up to $500,000 in both structural damage and content losses.
When talking about flood insurance coverage, it’s important to understand what the word “flood” actually means. Mark Carrasquillo, an agent at insurance brokerage E.G. Bowman Co., says many homeowners don’t have a proper understanding of the terminology and, therefore, don’t fully understand their coverage.
“Many consumers, when discussing or describing a loss, think that the words ‘flood’ and ‘water damage’ are interchangeable and mean the same thing,” Carrasquillo says. “This is entirely wrong. In the insurance world, the terms are very different.”
A flood is defined by the NFIP, in part, as: ”A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from overflow of inland or tidal waters, from unusual and rapid accumulation or runoff of surface waters from any source, or from mudflow.”
Water damage, essentially, is everything else. This includes the breaking or cracking of any part of an appliance or system that contains water, such as a water heater; water backup of sewers and drains; and rising water that may damage a basement. These are not covered by flood insurance.
Another critical caveat in the world of flood insurance concerns the basement. According to Frank Darras, an insurance attorney in California, the only items covered in your basement are structural elements as well as essential equipment, such as electrical and HVAC systems.
“Beware: If you have a finished basement with things like a pool table, carpeting, a flat-screen TV or expensive woodwork, they are not going to be covered by flood insurance,” Darras says.
Who should get it?
Fewer than 20 percent of homeowners in the United States carry flood insurance. “And that,” Darras says, “if a woefully low number.”
A big chunk of Americans who do carry flood insurance are homeowners who are required to buy it if they have mortgages from federally regulated, supervised or insured financial institutions for homes within a “special flood hazard zone.” This applies to homeowners in about 21,000 U.S. communities.
Even if your home is not in a federally designated flood zone, Janet Scott-Buckley, an office manager at Massachusetts-based Harrington Insurance Agency, says you still should consider buying flood insurance.
“The number one misconception is that some people are in a ‘flood zone’ and some are ‘not.’ Everyone is in a flood zone,” Scott-Buckley says. “Even lower-risk areas can experience a flood.”
Consider that about one-fourth of flood insurance claims are for properties outside zones that are at high risk for floods.
“It’s no-brainer coverage,” Darras says. “Do you think those people in Vermont and New Jersey and Delaware that were ravaged by Hurricane Irene ever contemplated flood insurance? Probably not. And now they’re in real trouble.”
To determine the flood risk for a particular region, current and prospective homeowners can visit the NFIP’s website (www.floodmsart.gov) to read national flood-hazard maps.
Franklin Reid, vice president of MetLife Auto & Home, says homeowners should frequently check these maps for updates, since new residential development can affect a region’s flood risk.
“So much development goes on that actually changes the terrain,” Reid says. “During a torrential rainstorm, the flow of the water is now different and can result in some heavy flood activity. We are seeing flood activity in areas of the country that haven’t seen flooding in many years.”
How much does it cost?
According to FEMA, several factors determine a flood insurance premium. These include the amount and type of coverage being purchased; the location of the property, including whether it’s in a flood zone; and the design and age of the structure being insured.
The average flood insurance policy costs about $600 a year, according to Reid.
“That, of course, is a very broad generalization,” Reid says. “If you are in a low-risk area, you might be able to buy flood insurance for as little as $150. If you’re in a high-risk area, such as living on the edge of a river bank or coastline, that premium can grow to $1,500 or $2,000 a year.”
Flood insurance deductibles also vary. According to Reid, residential deductibles range from $1,000 to $5,000, and business deductibles range from $10,000 to $50,000.
How is it purchased?
Even though FEMA underwrites flood insurance, homeowners can buy coverage from any insurance company that is a “write your own” carrier. MetLife, for instance, has been a write-your-own carrier for six years.
“All that means is that we are handling the paperwork and transactions between the homeowner and the NFIP,” MetLife’s Reid says. “But the federal government is the underwriter. They pay the claims. So whether you buy flood insurance from Allstate or MetLife or The Hartford or Liberty Mutual, it’s the same policy form and the same rates. Nothing will vary.”
Homeowners should be aware that it takes 30 days for a flood insurance policy to take effect. Given that time constraint, you shouldn’t wait until a storm is on its wait to buy flood insurance.
“There’s a good reason for this. After all, you can’t buy home insurance when your house is on fire,” Reid says. “So the government has to protect itself.”
For more information about flood insurance, call 800-427-2419 or visit www.fema.gov/nfip.