Flooding resulting from Hurricane Katrina
Flood insurance denotes the specific insurance coverage against property loss from flooding. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowlands, floodplains and floodways that are susceptible to flooding.
Nationwide, only 20% of American homes at risk for floods are covered by flood insurance. Most private insurers do not insure against the peril of flood due to the prevalence of adverse selection, which is the purchase of insurance by persons most affected by the specific peril of flood. In traditional insurance, insurers use the economic law of large numbers to charge a relatively small fee to large numbers of people in order to pay the claims of the small numbers of claimants who have suffered a loss.
Unfortunately, in flood insurance, the numbers of claimants is larger than the available number of persons interested in protecting their property from the peril, which means that most private insurers view the probability of generating a profit from providing flood insurance as being remote. However, there are insurers such as PURE, Chubb, AIG/Chartis, and Fireman’s Fund that do provide privately written primary flood insurance for high value homes and The Natural Catastrophe Insurance Program underwritten by Certain Underwriters at Lloyd’s which provides private primary flood insurance on both low value and high value buildings.
In certain flood-prone areas, the federal government requires flood insurance to secure mortgage loans backed by federal agencies such as the FHA and VA. However, the program has never worked as insurance, because of adverse selection. It has never priced people out of living in very risky areas by charging an appropriate premium, instead, too few places are included in the must-insure category, and premiums are artificially low.»The lack of flood insurance can be detrimental to many homeowners who may discover only after the damage has been done that their standard insurance policies do not cover flooding
Flooding is defined by the National Flood Insurance Program as a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or two or more properties (at least one of which is your property) from: Overflow of inland waters, unusual and rapid accumulation or runoff of surface waters from any source, and mudflows. This can be brought on by landslides, hurricanes, earthquakes, or other natural disasters that influence flooding, but while a homeowner may, for example, have earthquake coverage, that coverage may not cover floods as a result of earthquakes.
Very few insurers in the US provide private market flood insurance coverage due to the hazard of flood typically being confined to a few areas. As a result, it is an unacceptable risk due to the inability to spread the risk to a wide enough population in order to absorb the potential catastrophic nature of the hazard. In response to this, the federal government created the National Flood Insurance Program in 1968.
The National Association of Insurance Commissioners (NAIC) found that 33 percent of U.S. heads of household still hold the false belief that flood damage is covered by a standard homeowners policy. FEMA states that approximately 50% of low flood zone risk borrowers think they are ineligible and cannot buy flood insurance. Anyone residing in a community participating in the NFIP can buy flood insurance, even renters. However, unless one lives in a designated floodplain and is required under the terms of a mortgage to purchase flood insurance, flood insurance does not go into effect until 30 days after the policy is first purchased.
Flooding as a result of Hurricane Harvey in 2017.
Individuals who are eligible and who have mortgages on their homes are required by law to purchase a separate flood insurance policy through a private primary flood insurance company or through an insurance company that acts as a distributor for the National Flood Insurance Program (NFIP). Flood insurance may be available for residents of approximately 19,000 communities nationwide through the NFIP. Flood insurance may be available through private primary flood insurance carriers in any of the 19,000 communities participating in the NFIP as well as other communities that are not participating in the NFIP. In March of 2016, TypTap Insurance became the first private market, admitted carrier in the state of Florida to offer non NFIP flood coverage to policyholders.
After 2017 Hurricane Harvey, estimates of houses covered by flood insurance in the Texas resulting in over $30bn in property losses with only 40% of homes covered by flood insurance.
What is ‘Flood Insurance’
Flood insurance is a type of property insurance that covers a dwelling for losses sustained by water damage, as it specifically relates to flooding. A separate coverage rider is needed to cover sewer backup, if the backup was not caused by the rising floodwaters.
INSURANCE GRACE PERIOD
BREAKING DOWN ‘Flood Insurance’
A flood insurance policy is different than a basic hazard insurance or homeowners insurance policy, as it only covers losses that occur due to flooding. Standard homeowner’s insurance policies will cover most other losses as long as they are not related to flooding. These claimable events include losses sustained by fire, wind damage and falling trees, to name a few. Unlike a standard hazard policy, flood insurance requires a policyholder buy separate policies to cover a dwelling and its contents.
Flood insurance policies are available for all homes and commercial properties, not just the ones that are determined to be in the National Flood Insurance Program’s (NFIP) flood plain. However, properties that are located in a flood zone and are mortgaged by a federally backed lender will require adequate flood insurance coverage to receive financing. The NFIP regulates the pricing of flood insurance policies, and the cost will not differ between agents. Factors such as the zone designation, age of property and number of floors can impact premium pricing.
What is a flood zone
In conjunction with the NFIP, the Federal Emergency Management Agency (FEMA) works to keep up to date maps of the United States flood zones, the areas that are most likely to experience flooding. FEMA has worked to update the zones as they change along with new and intensifying weather patterns. The zones are broken up into subsections for rating purposes. Properties that are located in zones B, C and X run a moderate to low risk for flooding. Low risk means less than a one percent chance of annual flooding.
Properties that are located in zones designated with an A are considered high risk. They are broken down further, with descriptions of potential flood water heights and estimated rates of occurrence over the course of a 30-year-mortgage.
Properties that receive a V designation are similar to the ones located in zone A. These are high-risk areas that are positioned along the coast.
Some homeowners may be surprised to find themselves located in Zone D, which indicates that a determination has yet to be made for the area. The reviews of flood zones remain ongoing. In 2008, the maps were updated for the first time in 23 years. During that time, it was discovered that many maps were outdated and did not take into consideration man-made changes to the geography such as spillways and levees.
Flood zone determinations can be found by visiting the FEMA website and checking a property address against the flood map service center.