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Personal Risk Management

Flood Insurance Road Map and Coverage Guide

Kurt Thoennessen | October 11, 2019

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Most home owners do not want to think about the devastation a flood could cause to their home. But the fact is that heavy rain, snowmelt, and major storms like Hurricanes Irma, Harvey, Sandy, and Katrina can cause major flooding with little warning both inside and outside known flood areas.

Understanding your exposure to flood loss and the risks you face lets you take steps to mitigate them. The right flood insurance program, as a part of your risk mitigation plan, will help you avoid serious financial loss and provide peace of mind.

This article provides a road map to help you design a flood insurance program that fits your home's unique needs. Each section below showcases significant issues related to flood insurance for home owners. Being aware of these issues will ensure you are properly protected for the worst-case scenario.

The Government Is Not the Only Game in Town

Many home owners believe the only flood insurance product available is the one provided by the government through the National Flood Insurance Program (NFIP). This is not the case. The NFIP is the largest provider of flood insurance, with over 5.6 million policyholders, but there are other options to consider. (View a summary of coverage for the NFIP policy.)

Primary Flood Insurance Is Not Enough

Flood insurance is split into two parts: primary and excess flood coverage layers. The primary layer will provide up to $250,000 for your home or building structure and $100,000 for the contents or personal belongings within your home. The excess layer is a separate policy that will provide additional coverage above the primary layer and up to the full replacement cost of your home. If you have a home that will cost more than $250,000 to rebuild and personal belongings that will cost more than $100,000 to replace, you should consider purchasing an excess flood policy in addition to a primary flood policy. Excess flood insurance is often overlooked because most mortgage companies only require primary flood insurance to close a loan. Therefore, if you want to be able to rebuild your home after a loss, you will need to purchase excess flood insurance as well.

Not All Flood Insurance Policies Are the Same

There are several policy options available and many coverage differences that you should be aware of.

  • First, some flood insurance policies may withhold coverage after a loss depending on the number of properties affected or the number of acres inundated by the flooding. Other policies will provide coverage, even if your property is the only one affected.
  • You also want to be aware that some policies will not provide "replacement cost" coverage for a secondary home. Instead, they revert to "actual cash value" settlements, which will apply a depreciation calculation that diminishes the value of your settlement. Other policies provide "replacement cost" coverage for primary and secondary homes for the building and contents within.

Many homes in flood-prone areas are secondary or seasonal homes and may be situated on several acres. These two characteristics can drastically affect how a claim is settled depending on the policy that was put in place.

Flood Policies Have Hidden Limitations

Many people are familiar with the fact that most homeowners insurance policies provide coverage for their home, outbuildings, and personal belongings. It is not hard to imagine that these people may assume the same coverage would be afforded by a flood insurance policy as well. The harsh truth is, the coverage afforded by most flood insurance policies is more restrictive. Guest homes, swimming pools, pool equipment, docks, and many other types of outbuildings are not included as covered structures in most flood insurance policies. Even certain types of personal belongings located in a basement and finished basements are not well covered. Furthermore, reimbursement for additional living expenses you incur due to a loss would not be covered by most flood insurance policies.

Although a detached garage would have some coverage, the maximum coverage provided, in most cases, is far below what may be needed to rebuild some garages. If your flood insurance policy has gaps in coverage, you may be able to obtain the coverage needed through a different flood insurance policy that is designed with your needs in mind.

Valuable Possessions Are Not Well Covered by Most Flood Insurance Policies

Coverage for high-value personal property is one area where flood and homeowners insurance policies are similar. They both have limitations on coverage for high-value property such as artwork, jewelry, antiques, and silverware. The best way to ensure your most-prized possessions are properly insured is to purchase an "all-risk" valuable articles or collections policy. This policy includes flood coverage for your high-value items as well as coverage for many other causes of loss, including theft and mysterious disappearance. 

There Are Other Ways To Protect Your Property Besides Insurance

One of the best ways to prevent floodwaters from damaging your property is to incorporate flood mitigation strategies and flood-resistant design methods into the construction process. For example, installing flood vents in the foundation will allow water to pass through your foundation instead of creating hydrodynamic (flowing water) pressure that could push your house off its foundation. You can also install backflow valves on any pipes that leave the building or are connected to equipment located below the floodplain to prevent water or sewage from backing up into your home. Elevating your home above the base flood elevation will also help prevent serious damage from flooding. (For more information about flood-resistant design, see "Flood Resistant Design.") If you decide to implement any of these strategies, be sure to check with your insurance adviser about any discounts that can be applied to your policy.

Besides the preparations you can handle before a loss, it is important to know that most flood insurance policies will pay the cost of preventative measures you take to protect your property when a loss is imminent. Actions, like creating a barrier with sandbags or relocating personal property out of harm's way, are covered by most flood insurance policies.

Elevation Certificates Are an Important Part of the Rating Process

Elevation certificates show your home's positive, negative, or neutral elevation relative to the estimated height that floodwaters will reach during a major flood. They are usually required to obtain flood insurance for homes located in high-risk flood zones, but there are circumstances when they can be waived. Elevation certificates should be recent and include current pictures of all sides of the house. Older certificates can be used for some homes that have not been altered since the certificate was completed. This procedure is in place to ensure that your flood insurance policy is rated accurately.

In addition, if you are in the process of buying a home in a high-risk flood zone, it is helpful to learn about the prior owner's insurance program and to ask them for a copy of their elevation certificate. Sharing this knowledge with your insurance adviser may help them obtain more favorable terms for your policy. (View additional information about elevation certificates.)

Estate Planning Can Affect Your Insurance

A popular estate planning strategy is to retitle property into limited liability companies, trusts, and family limited partnerships. If you decide to do this as part of your estate planning efforts, it is important to make sure that any insurance policy related to that home accounts for the new ownership structure. This will help avoid confusion at the time of loss that could end up causing unnecessary delays or inaccurate claims payments.

Major Renovations Need To Be Accounted for

Major renovations are frequently undertaken, and these projects can cause serious coverage issues on a flood insurance policy. In order to avoid any unwelcome surprises with your coverage, it is important to notify your insurance adviser of the work you will be doing and keep them updated along the way. This is even more important if you think there will be work delays longer than 90 days since this situation could result in coverage issues.

Flooding is the most common cause of loss in the United States, with billions of dollars in losses on record in recent history. The most severe losses occur in areas that have been designated as having a high risk of flooding, but many losses also occur in areas where flooding is not expected. Despite these facts, the percentage of people who purchase flood insurance for homes located in or near high-risk flood zones is frighteningly low.

Key Concepts To Remember

To ensure you are well covered for a flood, there are a few key concepts to remember. First, you should engage an insurance adviser who specializes in personal insurance to make sure the unique needs of your home are satisfied. Second, there are options in the marketplace besides the NFIP, and it may benefit you to look into them as well. The last key concept to keep in mind is that flood insurance markets and products are changing rapidly, and this coverage should be reviewed on an annual basis to ensure you are paying an accurate rate and are properly protected from the disastrous effects of a flood.

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