A Flood Insurance Primer – Why Are So Few Homeowners Insured?

Flood insurance was a hot topic in the wake of Gulf Coast hurricanes Katrina and Rita. The lesson taken away from those disasters from a flood insurance perspective was generally the right one – The Congressionally-mandated flood insurance program does not work. Not nearly enough people buy flood insurance – ironically, far fewer buy mandatory flood insurance than would if the market were allowed to educate the public and convince them to buy it. To understand why so many homeowners even in hurricane prone areas lack flood insurance, it’s necessary to learn a little bit about how flood insurance works in America.

The who and what of federal flood insurance

The Federal Emergency Management Agency (FEMA) designates flood zones based on a number of factors, all boiling down to the chance property in the zone will suffer flood damage. Whether federally subsidized flood insurance will be required (under circumstances described below) depends on the flood zone the property is or will be located in.

The National Flood Insurance Program (NFIP) makes federally subsidized flood insurance available, including where mandatory. (The mechanics of how insurance can be legally “mandated” are covered below.) Because NFIP is a federal government program – and so, someone else’s money, unsullied by a profit motive — flood coverage is incredibly cheap.

Flood zones and what they mean (for insurance purposes)

There are three basic types of flood zones designated by FEMA, subdivided into several more detailed zones.

Moderate to Low Risk areas are designated by flood zones B, C and X.

Generally a less than 1% chance of flooding per year.
Flood insurance is “available” to homeowners in these zones through the NFIP.

High Risk areas are designated by flood zones A, AE, A1-A30, AH, AO, AR and A99.

Generally a greater than 1% chance of flooding per year.
Which generally translates into a 26% chance of flooding over the life of a 30-year mortgage.
Mandatory flood insurance rules apply for mortgages in these zones.

High Risk – Coastal Areas designated by flood zones V, VE and V1-V30.

Generally the same chance of flooding as A (High Risk) zones.
Mandatory flood insurance rules apply for mortgages in these zones.

There is also a Zone D, “undetermined” risk area.

The gulf coast is almost entirely designated High Risk – Coastal Area.

“Mandatory” flood insurance

To understand what “mandatory” means when it comes to flood insurance, it’s useful to step back and consider what Congress is and is not authorized to do under the Constitution.

The federal government cannot constitutionally mandate that people buy flood insurance. It cannot enforce building codes that would restrict the kind of construction authorized in certain flood zones.

What it can do is create a program, like the NFIP, and make it available to communities that pass and enforce flood zone building codes. You may be more familiar with Congress’ threat to withhold highway funds to states that did not set a 55 and then 65 MPH speed limit. Same principle: What Congress cannot constitutionally require, it may accomplish by creating a benefit and threatening to withhold it.

So: Communities become eligible to participate in NFIP by taking steps to ensure new construction and existing structures mitigate flood risk.

NFIP was created in 1968 as a voluntary program. Because of low participation, Congress “mandated” (we’re still getting to what that means) flood insurance in certain areas (now flood zones) in 1973. Participation remained low.

In 1994, Congress enacted flood insurance reform, continuing the “mandatory” nature of flood insurance and establishing new, severe sanctions for nonparticipation, in the form of requiring that homeowners having received relief purchase flood insurance to be eligible for similar help in the future.

You could stop reading here and know a lot about what’s wrong with flood insurance: Congress said that it would only take care of uninsured homeowners’ flood damage once. What this means to most people smart enough to have bought a home is that the federal government will take care of uninsured homeowners’ flood damage once.

Who is subject to the “mandatory” flood insurance law?

Not the homeowner – rather, federally regulated lenders, GSEs and public agencies. These entities are required to ensure that any mortgage secured by structures in a flood hazard area has flood insurance.

If required, flood insurance will be required at the time a loan, including a refi, is made. Generally, notice is given to homeowners that they are required to purchase flood insurance at their expense. If they fail after notice, the lender may purchase it for them and add the cost to the monthly payment if the property is in a flood hazard area.

Life of loan monitoring is not required by law. (This becomes important in a way we will see.)

Lenders face civil money penalties — no more than $100,000 aggregate per year — if (and only if) they engage in a pattern or practice of shirking their flood insurance responsibilities.

Why might a homeowner in a flood-prone area not have insurance?

This is the heart of the matter. Considering the history, politics and division of responsibility for ensuring that flood-prone homeowners have insurance, here is why they don’t:

People think homeowner’s insurance covers floods. It doesn’t.
Their property may not technically be in a flood zone designated by FEMA as requiring insurance, so it’s not mandatory.
They worked through a non-federally regulated mortgage lender, that did not sell their loan to Fannie Mae or Freddie Mac, so it’s not mandatory.
They have no mortgage — it may be paid off or never have been encumbered (the 90-year-old home that’s been in the family for three generations).
Lenders may not comply. A company originating $50 billion in mortgage loans in a quarter might economically view avoiding a possible $100,000 penalty as not worth the cost of rigorous compliance.
Homeowners get the insurance to get through closing, but then let coverage lapse, and they haven’t been “caught” because there is no mandatory life of loan monitoring.
Their community may not participate in the program.
They assume the government will make them whole after losses without their buying insurance. Generally, they’re right.
Flood insurance represents a failure of central planning, and an apt demonstration of it inferiority to the free market. To better ensure that homeowners in hurricane prone areas are insured in greater numbers, Congress should bite the bullet and withhold aid where flood insurance was cheaply available and a choice was made not to purchase it (continuing to help those who lack insurance for reasons beyond their control). It should continue to require flood insurance at loan closing where it has the power to do so, but open the market to private insurance companies and require life-of-loan monitoring if it’s serious about enforcing an insurance requirement. And penalties must be increased – the current one simply is not an economically feasible deterrent.

Disaster Preparation – Flood Insurance

Many people are unaware or apathetic to the risk of a flood in their area. Flood damaged homes and businesses can cost hundreds of thousands of dollars if proper protection is not taken. Most people living in highly risk areas for flooding will inevitably purchase flood insurance. But what kind?

It is often hard to know what kind of a policy you should invest in. Many home and business owners are unaware of what the typical cost for such coverage is and what the benefits of the coverage can be. To find the right insurance for you, it is important to understanding a little bit about what flood coverage is, what kinds of policies exist, and, most importantly, what coverage fits for your particular flood risk.

What is Flood Insurance?

There are three basic types of flood insurance:

“Dwelling” insurance usually covers residential buildings that contain no more than four families, residential condominium units, manufactured homes, and the storage contents of the insured building’s tenants.

General Property
“General property” policies tend to cover larger residential buildings like those that house more than four family units as well as certain commercial buildings, such as churches, schools, and small businesses.

Preferred Risk
“Preferred risk” policies are generally offered at a lower cost to residential and commercial building owners with a low to moderate flood risk levels.

Why Get Flood Insurance?

Many people don’t feel the need to protect themselves with flood insurance because of their location or the construction of their home. What these people don’t understand is that even a few inches of standing or moving water can cost thousands of dollars in infrastructure and restoration work. Flood insurance not only helps cover the financial burden of flood damage but many providers can help you find other disaster relief services, such as document restoration specialists.

Questions For Your Agent

Like any major purchase, it is important to understand what you will get and what the complete costs are up front. Take the time to ask your agent questions so that it is clear how your coverage will work.

Here are questions you should make sure you know the answers to when discussing policies with your insurance provider:

o Do I live in a flood zone? If so, how will my location affect the cost and benefits of my policy?
o What will be covered by my new flood policy and what won’t be covered?
o How much is the cost of the policy fee and premium, and are there hidden expenses or fees I need to know about?
o Do I need coverage for my building only, its contents only, or both?

Filing a Flood Damage Claim

Contact your insurance agent or company as soon as you realize that you have flood damage. Make sure you have the name of your insurance company and your policy number in an easily-accessible place. This will help speed up the filing process. You insurance provider will then schedule a visit with a claims adjuster and advise you on how they will proceed with your claim.

After you’ve contacted your agent you will need to make a list of all damaged or lost valuables. Separate your damaged goods from the undamaged ones and, with the help of your adjuster, start itemizing and calculating the value of the destroyed property.

Purchasing the right flood insurance doesn’t need to be an overwhelming experience. With a little research and an honest agency you can find an affordable plan that will cover your valuables should the unthinkable occur.

Get Cheap Flood Insurance Rates

Imagine this scenario. If you have flood water in your home, you will have to shell out thousands of dollars just to do damage control. Over the past decade, the claim for average flood has come to a total cost of $30,000.

It is the best solution for anyone to protect their homes and to also save their pockets from financial loss.

Flood insurance rates vary from customer to customer. It depends on what kind of homes they have. The insurance rates are different when the client is a homeowner, renter, condo renter or owner, or commercial renters or owners.

The insurance rates depend on the amount of insurance that they bought, how much it covers and the risk of flooding taking place in the area they are in.

The policies and the coverage that the insurance companies offer to their customers depend on the building and the content. Any insurance rates can be discussed with insurance agents.

Insurance companies only hire the best staff so that potential customers are well informed about the flood insurance quotes and flood insurance rates.

As homeowners, it is very necessary to insure homes and the contents. It is also practical to check out the location of the home. If it is a risk to flooding then it is definitely important to buy flood insurance.

The risk to flooding varies from high-risk to low-risk. There is also moderate risk when it comes to flood. This is another factor that affects the flood insurance rates.

In general, clients are given the moderate-risk factor. Clients who are eligible for the coverage of the insurance are given the insurance rates that comply with their lifestyle and their budget.

You can check the NFIP for the Preferred Risk Policy premiums as well as the lowest premium that is available for you. Also building and contents coverage begin at just a $100 per year. It depends on the insurance company that you signed up for.

Customers who don’t qualify for the Preferred Risk Policy can resort to the standard rated policy that is still made available for them. The flood insurance may not be required by the federal law in places that are considered to be low-to-moderate risk areas, but it is still practical to avail one.

Insurance companies have forms that provide the flood insurance rates for buildings or units, condominiums or houses in specific areas. These give the customers the rates, policies, and coverage that they can make advantage of if they do sign up for flood insurance.

It is important to learn your risk rate and the insurance available to you.

Why You Need Flood Insurance

Most people don’t know their homes are more likely to be damaged by a flood than a fire. If you think this vital bit of information doesn’t apply to you since you don’t live in a high risk flood area. Although, floods are rare they do happen and they happen everywhere, even in the most unexpected places. According to FEMA (Federal Emergency Management Agency), twenty five percent of flood claims come from areas with low to moderate flood risk.

Flood insurance is a critical way to protect your home and precious belongings from being destroyed. Here are some key reasons why you need it:

What You Should Know about Flood Insurance:

If you live in a low risk flood area you can purchase a Preferred Risk Policy that is lower cost (roughly $120 per month) but will still provide the essential coverage you need.
If you live in a high risk area you will be required to buy flood insurance. This demand is backed by FEMA.
If you rent and live in a high risk flood area flood insurance is highly recommended but not required.
Even if you live in a high level apartment building flooding can create mold and mildew problems that can destroy your valuables. Flood insurance covers this type of damage.
Manmade devices can fail and often do. In this case, the government will not always provide coverage for damages caused by manmade flooding. It’s better to be prepared.

Cheap Flood Insurance Quotes – Protect Your Home From Flood Damage

We all want to stretch our wallets. If we can get something at a cheaper price but receive the same benefits, we do it. If we want flood insurance, we try to get cheap flood insurance. As long as we get the same benefits from the general flood insurance cost, we go for less.

If you reside in an area that is prone to flooding, you should definitely get it. Imagine the flood ravaging your home. Imagine how much you have to spend for damage control. Imagine the cost of replacing what you lost. Buying flood insurance is the best option for any homeowner.

Home insurance does not cover flooding so if you can get cheap flood insurance, do so. This can protect you just in case flooding takes place in your area. You have to evaluate your assets and then get a policy plan that is available for you.

The first thing you should do is to check with your state agency. There are some states that have requirements when it comes to buying one. They can offer you cheaper policies if you live in an area that has a bigger chance of flooding.

There are states that initially provide the insurance policies at a cheap rate because of the possibility of flooding in the area and the homeowner really has no choice because flooding is a tragedy that one cannot avoid.

Before you sign up with any insurance company, you should check your Preferred Risk Policy. This is an affordable insurance that is an option for you if you are thinking of getting one like that.

The name of the policy that you are getting depends on the state that you are living in. If it so happens that the state you are living in is prone to flooding that the other states, then the chance of you getting cheaper plans is more likely.

Ignorance is something that should be avoided regarding this matter. Know as much as you can when it comes to flooding areas and flood zones and flood coverage and rates.

You can learn these from your insurance company as well as the National Flood Insurance Program which mitigates your state to assist you just in case the disaster does happen in when you are living.

Another thing you should remember is to not be overwhelmed when you are inquiring about flood insurance. If you want to get cheap flood insurance, then you can compare one insurance policy to the other. You can do this by visiting their websites and also talking to the insurance agents.

How Much Does Flood Insurance Cost

After seeing the historic flooding of Nashville, Tennessee, the question of “how much does flood insurance cost” is on many of our minds. After all, floods are devastating – and they’re not typically covered under typical homeowners insurance policies. National flood insurance is available through the National Flood Insurance Program.

As with most insurance, flood insurance rates vary based on amount of coverage and risk. For example, if you live in an area that’s prone to flooding, expect to pay more for flood insurance than someone who lives in a low risk area. Flood insurance is available for homeowners, condo owners, business owners, and renters.

According to FloodSmart.gov, the average flood insurance policy costs less than $570 per year. While that may be the average, that doesn’t mean you can expect to pay that amount. Again, it comes down to the flood risk and the amount of coverage you purchase. For example, if you live in a moderate-to-low risk area and you purchase $250,000 building and $100,000 contents coverage, you would qualify for a “preferred risk” policy with an annual premium of either $355 or $395 depending on if your home has a basement or enclosure.

On the other hand, if you live in a high risk area and purchase the same amount of coverage ($250,000 building and $100,000 contents), you can expect to pay an annual premium of $2633. The rates go up even higher for coastal areas (V zones). If you live in a V zone, you can expect to pay $5700 each year for the same amount of coverage.

To find out which flood zone you live in, go to FloodSmart.gov or FEMA.gov and look up the flood maps for your community. You’ll first enter your state and county and then you’ll enter your city. From there, you should be able to view detailed flood maps for your area.

Once you know your home’s general flood risk, you can look up rates on the FloodSmart.gov site. This will give you a general idea of what to expect. You can also enter your address at FloodSmart’s site. This will create a flood risk profile. You’ll see the property’s flood risk as well as a range of estimated costs for coverage. In addition, a list of nearby insurance agents is generated. Note that the rates will not vary by agent.

While the cost of flood insurance could be pricey, especially if you live in a high risk area, consider the cost of flooding and water damage. Just three inches of water can cause over $7800 in damage. Eighteen inches of water can cause over $26,000.

Like regular insurance policies, it’s important to understand what your flood insurance policy does and does not cover. For example, if you purchase flooding insurance covering the building only, then the contents of the home damaged by the flood will not be covered. In addition, if your basement has been improved with flooring and finished walls, these improvements are not covered.

Depending on where you live, flood insurance may be more affordable than you realize. If nothing else, checking your home’s flood risk will help you better understand the potential for flooding in your area and start you thinking about preparing for the next disaster.

Determining Flood Insurance Coverage

A homeowner is practical when he insures his home and the content. One must know whether the area he is residing in is high-risk, moderate-risk, or low-risk. The rates depend on the risk and the flood insurance coverage is also determined. The insurance premium covered by the company depends on these factors.

The coverage varies from one homeowner to the next. But first, they must be eligible for the coverage at the rate that they prefer and the rate that the insurance can offer them.

Preferred Risk Policy premiums are said to be really low if it is made available through the NFIP. The building and the contents of the flood insurance coverage is reasonable. As a matter of fact, it starts at only $100 per year.

If the homeowner fails to qualify for the Preferred Risk Policy, he can check the standard rated policy that is made available to him. This is $25 of all federal claims for those residing in moderate-to-low risk areas.

However, is the homeowner resides in a high-risk area, coverage from insurance companies are also made available to him. There is a separate content and buildings coverage which is more reasonable when it comes to the flood insurance rates.

One can check the form that is provided by the insurance companies. The General Property Form that a customer fills up requires the information that the insurance company needs in order to determine the rate and whether the client is eligible because he is within the insurance coverage.

The calculation of the premiums depends on the following factors. There are the years of the construction of the building and the years the occupant has been staying there. If it is a condominium, the number of floors is also a factor.

The location, as said in a previous paragraph is a crucial indicator whether the client is still within the flood insurance coverage, as well as the flood risks. If the customer is in a flood zone, there are still companies that can provide them with the flood insurance that they need but at a higher price.

Also, the federal law requires the homeowner to purchase a flood insurance policy especially when the area he is residing is high-risk.

By learning one’s risk and estimating the premiums by checking the flood insurance coverage, and finding an agent one can speak with regarding concerns, the homeowner can sleep better at night.