It is important that property owners understand their risk exposure to flood AND are aware that their property insurance policy most likely does not include this coverage. There are several options available to your clients for flood insurance, so read on to help them understand how to evaluate their risk and work to determine the right course of action for them.
What is a Flood?
A flood occurs when two or more acres of dry land or two or more properties are inundated by water or mudflow. This is typically the result of an overflowing body of water but could also be oversaturated ground from intense rainstorms causing water to seep through foundation walls, or damage from a hurricane or earthquake storm surge. It is important to note that even if the location has Named Windstorm and/or Earthquake coverage, it will not cover loss from storm surge flooding that results from either of those perils. To be considered a flood loss, the water must come from an external source (not from within the plumbing or sewer system). What many people consider to be a “flooded basement or kitchen” may actually be Sewer & Drain Backup or Water Damage when it comes to insurance.
Read more about the difference between various water-related losses here.
Knowing Their Risk
FEMA (Federal Emergency Management Agency) maintains maps of flood zones based on a given area’s risk of flood. These maps identify high risk flood zones – denoted as letters A (non-coastal) or V (coastal), moderate risk zones – denoted as letter B or shaded X, low risk – denoted as letters C or X, and letter D is areas with possible but undetermined flood hazards. The REInsurePro tech platform pulls the flood zone for you. You can look up a flood zone here.
Most mortgage companies lending on a property in an A or V zone will require that the property owner carry flood insurance. This is commonplace for federally-regulated or government-backed lending institutions.
However, even if the property is not in high-risk flood zone, the property owner may still be exposed to loss from a flood. In fact, 20-25% of flood losses nationwide are outside of a high-risk zone. Even in a moderate risk zone, there is a higher than 1 in 4 chance it could be flooded during a 30-year mortgage – more likely than a fire. The average flood loss can cost nearly $40,000, so flood insurance should be considered for any property, regardless of location.
What Flood Insurance Covers
A typical flood policy will have a set building coverage limit (commonly $250,000) and will cover essential systems in the home (such as electric and plumbing, furnace, HVAC, etc.), appliances, carpet, walls and built-in cabinets and shelves, foundation walls, and in many cases, a limit for a detached garage. Usually, personal property coverage can also be purchased up to a defined limit.
What is NOT covered includes damage by mold or mildew from a flood that could have been avoided, additional living expenses or loss of use if the resident has to relocate for a period of time, cars or vehicles, and oftentimes contents that are in the basement.
There are several options to consider Flood Insurance.
FEMA administers the National Flood Insurance Program (NFIP) which is backed by a network of around 60 insurers. NFIP rates are fixed across all providers and determined by the following factors:
- Flood zone/elevation of the property
- Type of coverage (building and/or contents)
- Level of coverage
- Design and age of the structure
- Location of the structure’s contents (e.g. where the utilities are located)
The cost will always be the same for the same property and coverage level. These policies offer up to a $250,000 building coverage limit for residential properties and $500,000 for 5+ units, plus the option of purchasing up to $100,000 of personal property coverage. This is an annual policy. FEMA is set to roll out a revised rating structure on Oct 1, 2021 which would also factor in flood frequency, flood type, and other property characteristics. This could cause an increase in NFIP rates, particularly in coastal areas.
One drawback of NFIP is that there is a 30-day waiting period to obtain coverage, unless it is purchased when the property is purchased, or the area is newly designated as a high-risk flood zone. This is an annual policy that can only be cancelled mid-term for a limited number of approved reasons (ex. mortgage is paid off, home is sold, or location no longer in high-risk area after a map change).
Flood Insurance is also available through private insurers. While coverage will be similar to that under the NFIP, private insurers can set their own rates based on a wider variety of factors, especially related to the building itself (age, square footage, number of stories, etc). Private flood options are also typically more flexible with coverage limits, waiting periods, and additional coverage options.
REInsurePro offers a Program Flood master policy which can simply be added onto the property and liability package on your client’s monthly schedule. The upsides of this option are that it is included in your monthly bill and remain in force unless it is cancelled (no annual payment or renewal) AND there is no waiting period – coverage can start right away. Properties with one to four units can obtain up to $250,000 of coverage and five to twenty-unit properties can obtain up to $500,000 of coverage, subject to a $1,000 deductible ($5,000 in Massachusetts).
Although this coverage is equivalent to NFIP, some lenders will only accept NFIP.
It is strongly encouraged to offer your clients flood coverage and be sure that if they decline that coverage, they know their exposure.