Flood Insurance

What Is Flood Insurance?

Flood insurance is a type of property insurance that covers a dwelling for losses sustained by water damage specifically due to flooding caused by heavy or prolonged rain, melting snow, coastal storm surges, blocked storm drainage systems, or levee dam failure. In many places, a flood is considered a vis major event, and the damage or destruction it causes are uncovered if you do not get supplemental insurance.

How Flood Insurance Works

A type of catastrophe insurance, a flood insurance policy is different than the basic hazard insurance coverage contained in a homeowners insurance policy. Standard homeowners insurance covers interior water damage, due, say, to a burst pipe, or weather events like tornadoes and rainstorms. However, it generally doesn't cover destruction or damage caused by floodwaters. Property owners who live in an area prone to this sort of natural disaster usually need to get special coverage.

Flood insurance basically works just like other insurance products: The insured (the home- or property owner) pays an annual premium based on the property's flood risk and the deductible they choose. If the property or its contents are damaged or destroyed by flooding caused by an external event (rain, snow, storms, collapsed or failed infrastructure), the homeowner receives cash for the amount of money required to repair the damage and/or rebuild the structure, up to the policy limit. Unlike a standard homeowners policy, flood insurance requires that a policyholder buy separate policies to cover a dwelling and its contents. A separate coverage rider is needed to cover sewer backup if the backup was not caused by the rising floodwaters.

Flood insurance policies are available for all homes and commercial properties.

Flood insurance is required coverage when applying for a federally backed mortgage of a property in a federally designated flood zone (an area at high risk of flooding due to heavy rains, flash flooding, and mudflows).

The National Flood Insurance Program

The National Flood Insurance Program (NFIP), managed by the Federal Emergency Management Agency (FEMA), offers flood insurance to homeowners in participating communities, along with those determined to be in the NFIP-designated floodplains. The actual insurance policies are issued by private insurance companies, not by the NFIP or FEMA.

In conjunction with the NFIP, the Federal Emergency Management Agency (FEMA) works to keep up-to-date maps of the flood zones in the U.S., the areas that are most likely to experience flooding. FEMA has worked to update the zones as they change along with new and intensifying weather patterns. The zones are broken up into subsections for rating purposes. Properties that are located in zones B, C, and X run a moderate to low risk for flooding. Low risk means less than a one percent chance of annual flooding.

Properties that are located in zones designated with an A are considered high risk. They are broken down further, with descriptions of potential floodwater heights and estimated rates of occurrence over the course of a 30-year-mortgage. Properties that receive a V designation are similar to the ones located in zone A. These are high-risk areas that are positioned along the coast.

Some homeowners may be surprised to find themselves located in Zone D, which indicates that a determination has yet to be made for the area. Flood zone maps are under continuous review (in 2008, the maps were updated for the first time in 23 years!) to accommodate changing weather patterns and artificial changes to the environment such as dams and levees.

Flood zone determinations can be found by visiting the Floodsmart.gov website and checking a property address against the flood map service center .

The Cost of Flood Insurance

The NFIP regulates the pricing of flood insurance policies, and the cost will not differ between issuers. If you live in a flood zone, or an NFIP-participating community, the NFIP can help you find an insurance agent.

To determine your policy cost your agent will look at things like the location and structure of your home — how near it is to a body of water, and its elevation — as well as the sort of coverage (replacement cost value or actual cost value) you have selected. Factors such as the flood zone designation, age of the property, and the number of floors can all impact pricing. A Preferred Risk Policy (a lower-cost flood insurance policy) provides both building and contents coverage for properties in moderate-to-low risk areas for one price. Certain communities that have implemented flooding safeguards qualify for discounts under the NFIP, too. As a result, annual premiums can vary widely.

The average annual cost of a National Flood Insurance Program policy

With NFIP policies, the maximum for residential structures is $250,000 in building coverage and $100,000 in contents coverage. The maximum for businesses is $500,000 in building coverage and $500,000 in contents coverage.

Of course, you can always seek out coverage on your own, especially if you want to insure your property for a larger amount (rates for additional coverage won't be regulated, however). Often, starting with the company issuing your regular homeowners policy is a good idea.