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Should I buy additional private flood-protection insurance?

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If you are putting together comprehensive insurance protection for your home, it is incomplete without coverage specific to the peril of flood. In the last decade, flooding events have cost property owners and insurance companies billions in damages. Consider that hurricanes Katrina, Sandy and Irene alone caused more than $26 billion in flooding damage.

Yet homeowners remain non-committal, and therefore in danger: Only an estimated 20 percent of homes at risk for flooding have proper insurance protection in place, while fully 50 percent of homeowners residing in low-risk areas are unaware that flood insurance is even available to them.

Flooding is excluded under a standard homeowners insurance-policy contract, and private insurers have traditionally chosen not to offer insurance against the peril of flood. In short, outside water entering the home, whether tidal or groundwater, is not covered by a homeowners insurance policy.

In response, the federal government created the National Flood Insurance Program (NFIP) in 1968. The NFIP allows property owners in participating communities to financially protect themselves against the devastation of floods. Participating communities agree to adopt and enforce ordinances that meet or exceed FEMA requirements to reduce the risk of flooding.

The NFIP defines flooding 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 must be the policyholder’s
property) from: a) overflow of inland or tidal water; b) unusual and rapid accumulation or runoff of surface waters from any source; or c) mudflow.

Most property owners can purchase coverage flood through name brand property casualty insurance providers who work with NFIP. They service the policies but are required to adhere to the NFIP rates, rules and guidelines. Therefore, base rates and policy contracts do not vary from company to company or agent to agent when purchased through an NFIP regulated insurer.

Yet rates still depend on several factors, including the home’s construction date, type of construction and the building’s level of risk. Flood policies for residential single-family dwellings provide for a maximum of $250,000 for the structure and $100,000 in coverage for contents. There is also a required 30-day waiting period before coverage takes effect—unless coverage is required by a mortgage company for a loan closing, in which case coverage is available immediately.

In recent years, private insurers such as AIG’s Private Client Group, which target high net worth individuals, have started offering flood coverage either as an endorsement to the homeowners policy or as an additional policy. Many times, these policies provide more comprehensive coverage, or pick up where the NFIP’s policy leaves off. These carriers also offer excess flood coverage for property owners who need higher limits of flood protection than primary flood policies provide. Again, rates for excess flood coverage are determined by the building’s level of risk for flooding. Typically, these carriers allow property owners to purchase whatever limitsthey feel are necessary.

Navigating the world of flood insurance can be difficult at times, which is why it is important to work with a broker well versed in the coverages provided.

Qualified brokers will also explain where flood policies may fall short—an example being that finished basements and personal items stored in basements are not covered under the NFIP’s policy contract. What’s most importantis that those brokers will always recommend flood insurance to complete the insurance protection package for a home.

This article was originally published in the April/May 2016 issue of Worth.

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