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What is Excess Flood Insurance and When Do You Need It?

You've invested in flood insurance provided by the federal government's National Flood Insurance Program. This means you'll be protected in case a flood washes out your home or severely damages your property, right? 

Maybe. It all depends on how much damage a flood causes and how much it costs to repair or rebuild your home.

Buying flood insurance from the NFIP is a good start toward protecting yourself from water disasters. But the financial protection that comes with a NFIP policy is limited. And that could hurt homeowners. 

If your home is worth more than the payout limits provided by an NFIP policy, you might have to spend plenty of your own money to rebuild your home and replace its contents.

There is an option, though: Homeowners can invest in supplemental insurance known as excess flood insurance.

When extra flood protection is needed

Brian Evans, president of Eastern Public Adjusters in New York City, knows how important flood insurance can be. His company helps homeowners and businesses recover financially from man-made and natural disasters.

He knows, then, that there are times when a standard flood policy from the National Flood Insurance Program doesn't provide enough financial protection.

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The problem is that a standard NFIP policy covers only up to $250,000 of damage to residential properties and up to $500,000 for commercial properties. NFIP policies also pays out a maximum of $100,000 to cover the contents of a home.

That might sound like a lot of protection. But if a flood completely destroys your home or business, you might be facing damage that costs far more.

This is where excess flood insurance comes in. As its name suggests, this type of flood insurance — which consumers must purchase from private companies   acts as a supplement to NFIP flood policies. Evans says that excess flood insurance is designed to address losses above that $250,000 or $500,000 NFIP limit.

"These policies will not typically be triggered until the policy limits under the NFIP have been exhausted," Evans says.

Flood insurance is often a requirement

When you buy a home and take out a mortgage, your lender might require you to purchase flood insurance, depending on where you live. Your lender will certainly require flood insurance if you live an area prone to floods.

How much insurance your lender requires you to take out depends on the value of your home. If your home is valued at more than that $250,000 limit, your lender will usually require you to purchase excess flood insurance in addition to an NFIP policy.

This might seem like a burden, but excess flood insurance does come with extra protections that could be financially helpful if your home is damaged or destroyed in a flood.

In addition to their lower coverage limits, NFIP policies also don’t come with loss-of-use protection, says Cameron Conboy, assistant vice president of product development at La Jolla-based insurance provider Palomar Specialty. This coverage kicks in if you lose your home and must pay to live somewhere else.

While NFIP insurance doesn’t provide this coverage, private companies offering excess flood insurance or private primary flood insurance do, including Palomar. The company provides a maximum of $50,000 in loss-of-use protection, Conboy says.

Flood insurance purchase options

When it’s time to buy flood insurance, homeowners do have options, even if they need more protection than what is provided by an NFIP policy.

Homeowners can skip the NFIP policy and buy a primary flood insurance policy from a private insurer that comes with higher protection limits. Just be aware that some lenders might require that you first buy an NFIP policy first.

Other owners might decide to purchase an NFIP policy and an excess flood insurance policy that will kick in once damages soar past the $250,000 limit.

"In some areas of the country, $250,000 might be plenty of coverage," Conboy said. "In other areas, it might not be nearly enough."

Excess flood insurance comes with another benefit, too. NFIP policies typically have deductibles that you must first pay before your policy kicks in, Evans says. That deductible can be high, with Evans saying it can often reach $5,000. If you have a deductible that high, you must first pay for $5,000 of damage out of your own pocket before your insurance coverage will cover the rest.

Excess flood insurance offered by private companies, though, typically does not have deductibles, Evans says.

The downside to these policies? They aren't easy to find, as not too many insurers offer them. They can be expensive, too. Finally, they are not required to follow NFIP guidelines. Evans says that excess flood insurance policies, then, are not guaranteed to cover the same kind of damage that NFIP policies must.

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The best move for homeowners is to shop around, do their research and know exactly how much their home and the valuables inside it are worth before they invest in any flood insurance.

"The best way for consumers to protect themselves is to have a good risk-management plan in place before a disaster strikes," Evans says.

Evans recommends that homeowners who live in areas prone to flooding call in a disaster recovery expert, such as a public adjuster, who can help them survey their valuables and determine how much they are worth. This expert can then be called upon if a flood does occur to help homeowners prepare their claims, increasing the odds that their insurers will provide adequate coverage.

"The name of the game is preparation," Evans says. "If you are reacting to a flood after the fact, you are likely to have problems getting the resources you need to rebuild. Best practice is to have a good understanding of your risk, then building a plan that best addresses that risk. Excess flood insurance is typically a key component of those plans."

Be aware of flood insurance exceptions

Even with excess flood insurance, you might not be protected from all water-related damages, Conboy says. That's because NFIP policies, and many flood policies offered by private insurers, set out certain triggers that must be set off for coverage.

The biggest? Flood insurance will usually only kick in if there is flooding on at least two or more neighboring properties or on two or more acres. This means that if your backyard is flooding but no one else's is, your flood insurance, either an NFIP policy or private policy, won't provide coverage.

If your home has a basement, flood insurance typically won't cover the cost of replacing items that were damaged in that part of the home, either.

Even with these restrictions, though, Conboy says that flood insurance is essential to many homeowners.

"What's most important that homeowners buy flood insurance in general," he says. "Whether you buy an NFIP policy or a private policy, it's important to protect yourself."

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