What You Need to Know About Flood Insurance

I live in an area that was hit hard by Hurricane Irene. Although I lost power for a few days, that was nothing compared to the devastation experienced by others in my neighborhood due to the local river overflowing its banks. After the initial rise due to the direct rains from Hurricane Irene, the river receded, only to crest even higher two days later due to runoff and swollen tributaries. Residents were given only a few hours’ notice to evacuate. Personal property placed outside to dry in the warm, sunny weather following the storm was swept away by the rapidly rising river. In the aftermath, I saw truckload upon truckload of ruined washing machines, dryers, refrigerators and hot water heaters hauled away. Moldy furniture lined the curbs, waiting for the trash pickup. Buildings were declared uninhabitable due to the damage. Thinking of the emotional and financial toll, I wondered how many of those affected were covered by flood insurance — my hunch is that very few were.

Although I live in a town along a river that is known to flood, many of those affected had never experienced flooding of this magnitude before, and I know that is the case in many of the areas affected by Hurricane Irene. In fact, according to FEMA, the Federal Emergency Management Agency, one-third of federal disaster assistance provided for flooding occurs in locations OUTSIDE of areas considered high risk for flooding.

Most homeowner’s insurance policies do not cover damage from floods. However, flood insurance is available in more than 20,000 communities through the National Flood Insurance Program, or NFIP. See if your community participates. Several policy types are offered, including homeowners, renters, condo owners, as well as commercial structure coverage. Premiums are relatively affordable; according to the FEMA website, homeowners in a moderate-to-low risk area can obtain building and contents coverage starting as low as $129 per year (although premiums can go much higher).

The following is a list of things you should know before purchasing federal flood insurance.

Premiums

Flood insurance premiums are based on a number of factors, including:

• Property location
• Year of building construction
• Number of floors
• Location of contents (coverage for basement contents is limited – see below)
• Deductible and coverage choices
• Type of coverage (homeowners, renters, etc.)

Homeowners located in a moderate-to-low risk area are eligible for coverage at a preferred rate.

Coverage can be purchased through private insurance companies and agents, and is backed by the federal government. Premiums should be the same no matter what company you purchase the coverage through. Note that depending on where your home is located, your mortgage company can require that you purchase a certain amount of flood insurance coverage as a condition of your mortgage. In addition, property owners who receive federal disaster assistance may be required to purchase flood insurance coverage under the National Flood Insurance Reform Act of 1994.

Coverage

There is typically a 30-day waiting period after your premium payment before coverage begins (there are a few minor exceptions). Even if you have experienced a flood previously, you can still purchase federal flood insurance. The insurance covers direct physical loss caused by a flood, defined as an excess amount of water on land that is normally dry (which sounds simple, but see FEMA’s website for the full definition). The maximum amount of Building coverage available is $250,000; Personal Property (Contents) insurance, which is purchased separately, has a maximum of $100,000. Most coverage is based on Actual Cash Value, defined as the Replacement Cost Value of an item at the time of loss minus depreciation. 

It’s important to understand what is not covered by flood insurance (no matter what type of policy or coverage you have):

• Property and belongings outside of a building, such as landscaping, septic systems, and swimming pools.
• Currency and valuable papers (such as stock certificates).
• Living expenses for temporary housing.
• Financial losses due to business interruption.
• Most vehicles.
• Most personal property stored in areas below the lowest elevated floor (i.e. basements, crawlspaces, and walkout basements). However, central air conditioners, water heaters, furnaces, heat pumps, sump pumps, and solar energy equipment functioning (not just stored) in such spaces are covered under Building Property coverage, and washers/dryers, freezers (but not refrigerators), and portable window air conditioners functioning in such areas are covered under Personal Property coverage.

Most NFIP policies also include coverage for up to $30,000 to bring a home declared “substantially damaged” or “repetitively damaged” by flood up to current community standards either by elevating, demolishing, or relocating the home. However, the $30,000 is combined with the amount of your building damage claim to reach the maximum limit of $250,000 for Building Property coverage.

This is just a brief summary of the federal flood insurance program. Note that the NFIP is set to expire as of September 30th, and is awaiting legislation extending the program. For more information, contact your own insurance advisor or visit www.floodsmart.gov or www.fema.gov. For a relatively small premium, you may be able to supplement your homeowner’s insurance with some powerful protection.

FPA member Leslie T. Beck, CFP®, MBA, is a founding member of Compass Wealth Management LLC in Maplewood N.J.