How the National Flood Insurance Program works

Page content

How important is flood insurance? If you live in an area at risk of flooding and apply for a mortgage through a federal mortgage provider or an insured lender, the Government requires that you have flood insurance. Moreover, if you received a federal grant or loan in a previous disaster, a request for help in a later flooding will be affected if you don’t have flood insurance. Flood insurance can make sense even if you live in an area that is not prone to flooding. This is because flooding can happen in the most unexpected ways. Flash floods, spring thaw or a clogged drainage system can all lead to flooding. They are usually not covered in a home insurance policy.

The National Flood Insurance Program

Insurance companies normally do not provide flood protection due to “adverse selection”. This means that flood insurance is usually bought by those who are at high risk of flood perils and most likely to file claims. Insurance companies cannot spread this risk among a large population base. Traditionally, claims are covered from premiums earned.

Congress introduced the National Flood Insurance Program (NFIP) in 1968. This program covers flood insurance, flood plains management and flood hazard mapping. You are eligible to receive flood insurance if your community participates in the NFIP by agreeing to enforce its floodplains management regulations. The Federal Emergency Management Agency (FEMA) which manages this program provides flood coverage through participating insurance companies and agents. Flood insurance is available for owners of single family dwellings, business owners and renters.

Flood Insurance Coverage

The NFIP defines a flood as “ a general or temporary condition of partial or complete inundation of 2 or more acres of normally dry land or 2 or more properties (at least one of which is your property) from overflow of inland waters, unusual or rapid accumulation or runoff of surface water from any source or mudflows”. Any event that influences flooding, such as an earthquake or hurricane, qualifies for a claim.

Flood insurance coverage is provided for buildings and contents or only contents. A principal dwelling can be insured up to the maximum allowed or no less than 80% of its replacement value at time of loss, to qualify for a claim. A principal dwelling can have coverage up to $250,000 and personal property (contents) up to $100,000. All other buildings and contents are insured for Actual Cash Value, which is the replacement cost at the time of loss less physical depreciation. Some insurance companies offer additional coverage for contents. Deductibles are available separately for buildings and contents. Some mortgage providers place a limit on deductibles.

Flood insurance rates are set and are the same irrespective of which insurance company or agent provides your coverage. The rate depends on your risk profile which takes in to account the location of your property, its age and type of construction. FEMA updates flood hazard maps across the country. The classification for your area can change from high to moderate risk or vice versa with such updating. Premiums can increase or decrease accordingly. Inquire from your insurance provider about taking out a Preferred Rate policy to guard against premium increases.

The Flood Insurance Rate Maps drawn by FEMA can classify your area as high risk (Special Flood Hazard Area), moderate-to-low risk or undetermined-risk. According to the NFIP, a high risk area has a 26% chance of experiencing a flood during the life of a 30 year mortgage. Hence the federal government’s requirement of flood insurance for mortgaged properties in high risk areas. Even if your area is moderate-to-low risk, NFIP recommends flood insurance as 25% of all flood claims has originated from this category.

Be Prepared

Floods and other natural disasters happen when we least expect them. While we wish to be spared from such upheaval, it is wise to prepare for any eventuality. Keep all financial documents, as well as receipts for large purchases such as appliances and furniture in a safe place. Keep important telephone numbers and insurance policy details in a place that is accessible to all family members. Maintain lists and photos of valuables in a safe place. Have emergency supplies of food and essentials handy. Agree with your family on a plan to leave your home if necessary. If flooding occurs, follow directives given by a disaster management authority relating to the safe use of power, water and possible evacuation.

How to File a Claim

In the unfortunate event that your property gets flooded, the first thing that you do is to assess the state of your home and its contents. Take photos of structural damage to your home as well as contents to support your claim. Make a list of damaged items along with their original value with any supporting receipts or appraisals.

To file your claim, call your insurance company. Provide your name, policy number and contact details. A loss adjuster will contact you in a few days time. The adjuster will use your list as well as inspection of the property to adjust your claim. This Proof of Loss form is prepared by the adjuster and signed by you in agreement with your insurance company as to the accuracy and extent of your damage. It is required by the NFIP and your insurance company to support your claim. You will receive payment once processing is complete.

Why Flood Insurance makes sense

Past events in an area are no indication that your area is free of flooding. Heavy rainfall, tidal surges, changes to buildings and new developments are all cited as factors for flooding in areas previously free of such occurrences. Damage caused by flooding can be expensive to replace. Paying a premium to mitigate such loss is a comparatively small price to pay. That is why flood insurance makes sense. For more information call the NFIP toll free at 1-888-379-9531.