A primer on Flood Insurance

By Josh Overmyer October 14, 2018

Four days ago, Hurricane Michael became the fourth Category 4 Hurricane to impact the United States in the past 13 months, when it struck the Florida Panhandle with 155 mile per hour winds and an estimated storm surge of 14 feet. The other three Category 4 Hurricanes were last year as Harvey in Houston (perhaps the wettest storm in history, dropping over 50” of rain in some locations), Irma in the Florida Keys and Southwest Florida, and Maria decimated the US territory of Puerto Rico. Untold millions of lives were disrupted by these 4 storms and their impacts across the coastal states of the Southeast US.

Last month, Hurricane Florence weakened just before landfall from Category 4 to Category 1, but still became the wettest storm to ever impact the Carolinas, dumping more than 35” of rain in some areas. This heavy rainfall led to weeks of flooding as the inland rainfall flooded rivers all over North and South Carolina, and that water in the rivers had to make its way back down to the Atlantic Ocean by rushing down through watersheds throughout the area.

Unfortunately, most of the people impacted by these storms, and the others that have ravaged this country in the past several years, do not carry flood insurance. Many people incorrectly assume that their homeowner’s insurance covers them from all perils, including flooding, but homeowner’s insurance very rarely covers flooding, which is the most common natural disaster in the United State. The term “flood” is defined as a general and temporary condition of partial or complete inundation of 2 or more acres of normally dry land area or of 2 or more properties.1 A flood does not mean a burst pipe, or an overflowing bathtub, both of which may be covered by your homeowner’s insurance policy.

Some people incorrectly assume they will be eligible for free money from FEMA if their house is damaged by flooding or a hurricane. While FEMA does have programs that give cash payments to survivors of certain storms, these typically require the storm to have impacted a large area and have done widespread damage, enough to meet the damage thresholds required under the Stafford Act for a Presidential Damage Declaration. If the storm is not sufficiently damaging to a large area or a high enough total cost of damages, many of the elements triggered by a Presidential Damage Declaration will not become available. Even when things like FEMA’s “Individual Assistance” (IA) program are activated, the average IA payment from recent storms have been $5,000-6,000, compared to the average National Flood Insurance Program (NFIP) flood insurance payment of $90,000+. Just 3″ of floodwater inside your home can cause $12,000-$30,000 in damage to the structure and contents.

Other available programs include the Small Business Administration, which offers low-interest loans to people and businesses needing to rebuild, but these loans must be paid back. Long after the storm, mitigation assistance funding becomes available through the Hazard Mitigation Grant Program, but a homeowner typically needs to have already been working with their local government on a plan to mitigate or buy-out their property for the community to prepare a grant application and submit to their State or FEMA for HMGP or other mitigation funding.

By now, I hope you are seeing that Flood Insurance is the best option to protect the largest investment most people ever make in their lives – their home. Did you know that over the course of a 30-year mortgage, homes in the “Special Flood Hazard Area” or ‘flood zone’ has a 26% chance of flooding from a 1% annual chance flood (commonly referred to as a 100-year storm)? That’s about twice as likely as suffering a house fire, yet almost all of us carry insurance that covers fire.

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Flood insurance is most often sold through your typical flood insurance companies, on behalf of the NFIP, which assumes the flood risk. Flood insurance is available to homeowners, renters, and businesses. For residential properties, the maximum structural coverage is $250,000, with a maximum of $100,000 in contents coverage. Renters don’t need to carry the structural coverage to be able to purchase up to $100,000 in coverage for their belongings. Non-residential properties can purchase up to $500,000 in structure coverage, as well as $500,000 in contents coverage, since many businesses have expensive equipment necessary to run their business.

The private insurance market is small but growing in this country. Many private insurers may have similar coverage limits as the NFIP policies, while some have their own underwriting standards and coverage limitations. A hybrid approach is also available, with coverage up to the maximum of the NFIP coverage limits, and then a policy with a private insurer for “surplus lines” in excess of the NFIP limits. This is advantageous to the private companies because the NFIP flood insurance fund is on the hook for the first $250,000 in structural damage and the first $100,000 in contents. The surplus lines coverage would not have to pay out unless/until a major disaster wiped out at least a quarter million in the home’s value.

Some reasons that flood insurance may be cheaper through private insurance companies because NFIP premiums are collected into the National Flood Insurance Fund, which pays out flood insurance claims, flood insurance studies and mapping for participating communities, and for hazard mitigation programs such as Flood Mitigation Assistance and Pre-Disaster Mitigation grant programs. In addition, the Flood Insurance Fund is paying interest on money borrowed from the US Treasury to cover past claims, especially Hurricanes Katrina (mostly forgiven by Congress in 2018), Sandy, Harvey, Irma and Maria. Furthermore, FEMA has been tasked with building a reserve fund to pay future claims without borrowing from the Treasury. FEMA also has purchased “reinsurance” from large global insurance companies for the past 2 years to help spread the risk exposure of the NFIP.

The NFIP makes flood insurance available in over 22,000 participating communities nationwide that have agreed to adopt and enforce development standards in their identified floodplain areas. Among these 22,000+ communities, approximately 1,500 communities have joined the voluntary Community Rating System that awards flood insurance premium discounts to policies in those communities for adopting higher standards than the minimum, and for other public education, outreach and other floodplain management-related activities. The three goals of the Community Rating System (CRS) are to:

  1. Reduce and avoid flood damage to insurable property
  2. Strengthen and support the insurance aspects of the NFIP
  3. Foster comprehensive floodplain management.

The CRS program is a points-based program, offering a 5% discount for every 500 points that a community earns from 19 Activities and 92 specific elements, subject to meeting certain perquisites. Discounts range from 5% for many beginner communities in the CRS program, up to 45% for 1 community named Roseville, California, which has earned the required 4,500 points to earn the highest rating of Class 1. These discounts are applied automatically to NFIP policies in the CRS-participating communities, so be sure to check the “declarations page” of your flood insurance policy documentation for a CRS discount. While “only” about 1,500 communities participate in CRS, those communities represent over 70% of the policies in the nation. This make sense, as the largest communities and areas with the highest rates of flood insurance coverage stand to gain the most by documenting their efforts to reduce and avoid flood damage in their communities. The community I live in currently saves its residents over $14M per year in flood insurance, and the community I work for saves over $6.6M per year.

To find out if your property is in a “Special Flood Hazard Area” or ‘flood zone,’ please check out the FEMA Map Service Center website. You can enter your address and it will load the current Flood Insurance Rate Map for your area.

If your property is not in a “Special Flood Hazard Area” or if you have been recently mapped into the SFHA, check with your insurance agent about receiving a Preferred Risk Policy. These typically can be had for a few hundred dollars per year, rather than the full-risk rate which may cost $1,000 or more, depending on the specific flood zone and/or the elevation of the finished floor of the home. The only way for an insurance company to properly rate a policy is with an Elevation Certificate prepared by a licensed surveyor. This will show information such as the community name and community ID number (for application of any potential CRS discount), the flood zone and required Base Flood Elevation, the elevation of the finished floor of the home or structure, the elevation of any attached garage or enclosure, and the elevation of any machinery or equipment servicing the building. All these factors are factored into the rate that each policyholder will pay for their unique flood risk on their property.

To recap:

  • Your homeowner’s insurance does not cover flood damage.
  • Flooding is more frequent than ever and has affected all 50 states since the year 2000.
  • Individual Assistance from FEMA averages $5k-$6k, while flood insurance pays out an average of nearly $90,000.
  • Your community is probably already working hard to earn you a discounted premium. If they are not, ask them to join the CRS to save their residents and property owners money on their flood insurance.
  • If your home is flood-prone, there may be mitigation grant money available to buyout or elevate the home.

Please feel free to reach out to me with any questions, as I am a Certified Floodplain Manager, with experience in coastal and riverine communities, along with 3.5 years working in the State Floodplain Management Office in Florida. I currently serve as the Secretary of the Florida Floodplain Managers Association board of directors, and I was fortunate to give a presentation at the Association of State Floodplain Managers annual conference in June 2018 about my experience with the Community Rating System pilot program in Florida. I can be reached at Josh.Overmyer@gmail.com.

1 FloodSmart.gov, the official website of the National Flood Insurance Program (NFIP).

9 thoughts on “A primer on Flood Insurance”

    1. It’s actually a lot simpler than you’d think, once you are familiar with the terms. Basically it boils down to: which risk zone are you in (high, medium, low), and how high is your finished floor relative to the expected flood height of the 100-year storm. Insurance gets cheaper for each foot up you go (until roughly 4 feet above the expected flood height), and it roughly doubles in price for every foot below the expected flood height.

  1. Wow this is a great break down of why flood insurance is important. You’re right that we are seeing more and more severe storms in more and more places. Scary times.

    I think it’s odd that regular home owners insurance doesn’t cover floods. Do you know why that is?

    1. Historically, flood insurance was something that just had too many unknowns to be profitable for private insurance companies. There is also concentration risk; one big flood could wipe out a whole area, so there needs to be a big enough risk pool (perhaps nation-wide) to protect against any single event wiping the company out of business. And that’s sort of how the National Flood Insurance Program started in 1968, but 50 years later, with sophisticated modeling and rating standards, these private companies are willing to bite around the edges and take on some of that flood risk. They also stand to benefit from decades of better floodplain management standards for new construction around the country, because FEMA requires that step for communities participating in the NFIP.

  2. This is an awesome post. Thanks Josh! I’m in real estate and I’ve not seen (or written) a post like this. So kudos to you! I’m going to spread it around so more people can see it.

    1. Thanks Coach! I’ve spent the last 6+ years on the regulations side of the NFIP, but a big part of what we try to do in the CRS program is educational outreach and encourage flood insurance. It’s not perfect, but it’s what we’ve got to work with from the myriad amendments through the years from Congress.

  3. I have noticed more private flood insurers popping up lately. I’m assuming the private insurers can choose not to insure in the high risk zones and that’s how they keep the costs lower?

    Neptune Flood is the one that I noticed – https://neptuneflood.com/

    I don’t recall how much cheaper it was than a NFIP policy – I have not purchased either, living in a desert, but perhaps I should.

    1. It’s certainly true that the private carriers can cherry-pick to an extent, but I’ve actually heard that a few are choosing riskier properties because of higher rates. They would be wise to cherry-pick new construction that is built to current building and flood code standards.
      It will be interesting to see how the private market fares in the face of a big flood event… Will they go bellt-up or flee like the insurers did from Florida after 04-05? Will homeowners be able to go back to the NFIP at reasonable rates, or will they be hit with actuarial rates (plus the fees and surcharges that help pay for mapping and mitigation)?

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