Flood Insurance by alicejenny



Flood Insurance                                                                  v1165

                                                                       In This Chapter...
                                                                 History of Flood Insurance

                                                                 Eligibility for Flood Insurance

                                                                 Flood Policy Coverage

                                                                 What is a Flood?

                                                                 Misc. Flood Insurance Points

      F     lood is one of our super exclusions – it is almost never covered in
any policy. The notable exceptions are that floods are covered by both Auto
Insurance and Inland Marine (shipping and transportation) Insurance. Other
than these two minor exceptions, let’s assume that we will have to pay extra for
Flood Insurance, which is a stand alone policy. It is possible to insure a property
against floods without having any fire or other peril coverage on the property.

It’s no secret that government has become heavily involved in the insurance
industry. In many places, people are required by law to purchase certain kinds of
coverage, such as auto liability. And insurance of every type is closely regulated
by one agency or the other. Most governmental involvement in insurance occurs
at the state level, but we’re about to take a look at one instance in which the Feds
get into the act. And like many things federal, they do it in a BIG way.

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  10-2                                Property

                                                      History of
                                                   Flood Insurance

                               1      First, a little history. Floods cause more Property Damage than
                               2      any other kind of natural disaster, and the federal government
                               3      has for many decades been involved in preventing and recovering
                               4      from flood disasters. When rivers spread beyond their banks, de-
                               5      stroyed property, and then receded, the U.S. Government would
                               6      come in to help clean up the mess, build dikes, and construct
                               7      dams (or sea walls in the case of hurricanes). And, of course,
                               8      millions of dollars of federal tax money went to help flood vic-
                               9      tims relocate, rebuild, or repair damaged homes and businesses.
                              10      In short, the federal government was spending a ton of money
                              11      on flood prevention and flood damage relief, while people in
                              12      flood-prone areas paid nothing until they were hit with a flood
                              13      themselves.

                              14      These flood prevention efforts often took place only in places
                              15      that had suffered previously. Thousands of other flood-prone
                              16      communities did little or nothing to prepare for the flood waters
                              17      that might one day arrive. And even after a flood, people often
                              18      rebuilt in the same place only to be flooded again a few years
                              19      later. And why not? The Feds would always be around to help
                              20      – right? Communities got in the habit of relying on the federal
                              21      government to assist them in times of flood.

                              22      All this changed in 1968 with the passage of the National Flood
                              23      Insurance Act, which provides Flood Insurance at taxpayer
                              24      subsidized rates. Flood Insurance is the only policy on the exam
                              25      that will be referred to as “subsidized by the federal government
                              26      through federal taxpayers.”

                              27      This act created the National Flood Insurance Program
                              28      (NFIP), an attempt by the U.S. Government to find a better way
                              29      to both prevent floods and to help the people affected by them.
                              30      The NFIP is administered by the Federal Emergency Manage-
                              31      ment Administration (FEMA). The laws governing the NFIP
                              32      have been modified a couple times since the program’s birth in
                              33      1968, but the underlying premise has remained the same: The
                              34      federal government will provide Flood Insurance to homeowners
                                                             and businesses in flood-prone areas.
                 Test Tip...
         Flood insurance premiums are subsidized
         by the taxpayers.

                                      Flood insurance                            10-3

Since 1994, any property financed at a federally regulated bank        1
must be covered by Flood Insurance if the property is located          2
within a defined flood-prone area.                                     3

The federal government sees flood prevention and the providing         4
of assistance to flood victims as being in the national interest.      5
With Private Insurers unwilling to offer coverage, the federal gov-    6
ernment took upon itself the responsibility for making Flood In-       7
surance available. Initially, this coverage was provided to Insureds   8
by an association of Private Insurers who were themselves subsi-       9
dized and covered by the government. In 1978, private company          10
involvement was discontinued, and the government itself began          11
administering the NFIP. It took only a few years, however, for         12
the Feds to realize that private involvement contributed signifi-      13
cantly to the program, and in 1983, commercial Insurers were           14
brought back into the picture.                                         15

The “Write Your Own” Program allows private insurance                  16
companies across the country to sell flood policies. The federal       17
government is no longer the sole source of Flood Coverage.             18

But don’t be misled. Although private insurance companies may          19
sell and service the policies, the federal government takes ALL        20
the downside risk. When a Private Insurer sells a Flood policy,        21
it is allowed to keep a portion of the premium to cover commis-        22
sions and the expense of processing contracts and claims. The          23
remaining premium money is invested and used to pay claims,            24
but if a company’s Flood Insurance claims are greater than its         25
premium and investment income, the government makes up the             26
difference. The Private Insurer takes no risk.                         27

Today, the Standard Flood Insurance Policy is available either         28
from the government or from the hundred or so private insur-           29
ance companies that have chosen to participate in NFIP. This al-       30
liance forms a kind of two-tiered sales and servicing system with      31
a single underwriter – the government. But regardless of where         32
a Flood Insurance Policy originates, the coverage is identical to      33
every other Flood Insurance Policy in the NFIP.                        34

The NFIP policy provides rather limited coverage. For example,         35
an owner of a single family home can only insure the home for a        36
maximum of $250,000 and the Personal Property (contents) for a         37
maximum of $100,000. As a result, some private insurance com-          38
panies are beginning to offer supplemental insurance to provide        39
better coverage and higher limits. The exam, however, will focus       40
on the federal policy.                                                 41

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                                                       Eligibility for
                                                      Flood Insurance

                                1       Who’s eligible for NFIP protection? The NFIP identified the
                                2       most flood-prone places in the country – about 20,000 of them.
                                3       Only these areas may participate in the program. Although the
                                4       federal government subsidizes the premiums, the premiums are
                                5       actuarially based. Those properties that are more likely to experi-
                                                              ence a flood pay higher premiums.
                 Test Tip...
         To be eligible for Flood Insurance, a community
                                                                The NFIP is available only in communi-
         must have a Flood Control Program.                     ties that choose to participate by agree-
                                                                ing to adopt a Flood Control Program
                                                                – including flood prevention measures and
                               11       improved land use regulations. For example, a community may
                               12       need to agree to build a dike or sea wall, to stop putting homes
                               13       and businesses in flood-prone areas, to construct storm drains, or
                               14       require buildings to be flood resistant, and so on. Once the com-
                               15       munity has signed on to the program, all residential buildings, all
                               16       farm buildings, all commercial buildings, and the contents of all
                               17       the buildings are eligible for coverage.

                                         Emergency and Regular
                                         Flood Programs

                               18       When a community first applies to participate in the NFIP, it
                               19       enters the emergency phase. This does not mean that a flood
                               20       emergency is at hand, and it might have been more appropriately
                               21       called the initial phase, or stage one phase, or something else. But
                               22       emergency phase it is. While a community is in the Emergency
                               23       Program, federal authorities study the area’s unique situation and
                               24       conduct a detailed engineering study. They then issue a Flood
                               25       Insurance rate map that establishes risk zones and insurance rates
                               26       for the entire area. Once this study and mapping are complete,
                               27       the community leaves the Emergency Program and becomes part
                               28       of the Regular Program.

                               29       One of the distinctions between the emergency and regular phas-
                               30       es is the amount of insurance available. While in the Emergency
                               31       Program, the maximum amount of available coverage is:
                               32           • $35,000 for a single family home;
                               33           • $10,000 for the contents of all residential buildings;
                               34           • $100,000 for multi-family residential buildings;
                               35           • $100,000 for commercial buildings; and
                               36           • $100,000 for the contents of all commercial buildings.

                                       Flood insurance                                           10-5

Once a community moves to the Regular Program, these limits                1
increase to:                                                               2
    • $250,000 for a single family home;                                   3
    • $100,000 for the contents of all residential buildings;              4
    • $250,000 for multi-family residential buildings;                     5
    • $500,000 for commercial buildings; and                               6
    • $500,000 for the contents of all commercial buildings.               7

     Flood Policy Coverage

NFIP insurance is designed to protect against damage to build-             8
ings and their contents. These two coverages – buildings and               9
contents – are purchased separately and have separate deduct-              10
ibles. Covered property that is removed from the covered prem-             11
ises to avoid flood damage is covered in its
temporary location for 45 days.                         Test Tip...
                                                    Buildings and contents have separate Flood
Under the policy, the definition of building      Insurance policies.
    P awnings;
    P garages, but not carports;                                           17
    P blinds;                                                              18
    P built-in appliances;                                                 19
    P carpet permanently installed over an unfinished floor;               20
    P elevators;                                                           21
    P outdoor antennas and aerials attached to the building;               22
    P cupboards and cabinetry;                                             23
    P hot water heaters;                                                   24
    P stoves; and                                                          25
    P refrigerators.                                                       26

Specifically excluded from Building Coverage are:                          27
   ○ land, lawns, trees, shrubs, and animals;                              28
   ○ decks;                                                                29
   ○ fences, retaining walls, seawalls, piers, bridges, and docks;         30
   ○ sidewalks, patios, and driveways;                                     31
   ○ underground structures such as septic tanks and wells; and            32
   ○ attached or detached carports.                                        33

Contents coverage applies only to Personal Property inside the             34
building at the time of the flooding. All the normal contents,             35
such as furniture, clothing, and television sets, etc., are covered.       36
Generally, there is very limited coverage for items in a basement.         37
Assuming that the contents are not in the basement, the policy’s           38
contents coverage covers Personal Property items such as:                  39

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                                1           P portable air conditioners;
                                2           P carpets installed over finished floors;
                                3           P carpets not permanently installed;
                                4           P washers and driers;
                                5           P freezers; and
                                6           P portable dishwashers.

                                7       Specifically excluded are the following items of Personal
                                8       Property:
                                9          ○ money, stamps, bullion, or valuable papers;
                               10          ○ propane tanks and fuel oil tanks;
                               11          ○ aircraft;
                               12          ○ boats;
                               13          ○ exterior hot tubs;
                               14          ○ exterior swimming pools;
                               15          ○ automobiles;
                               16          ○ recreation vehicles; and
                               17          ○ travel trailers.

                                                                Flood Coverage does not extend beyond
                 Test Tip...                                    buildings and the stuff that’s in them.
         Flood Insurance covers contents within a building
         – things outside the building are not covered.         Loss of use is not a covered item either.
                                                                If your home is flooded and you have to
                                                                live in a motel for three months, that indi-
                                                                rect or consequential loss expense is not
                               24       covered. Flood Insurance covers only direct loss – there is no
                               25       coverage for indirect loss.

                                                      What is a Flood?

                               26       This is the ultimate named peril policy - the single peril covered
                               27       here is a flood, which the NFIP defines as a temporary covering
                               28       of normally dry land areas due to any of the following:
                               29          • The overflow of inland or tidal waters (tidal surge);
                               30          • The unusual and rapid accumulation or runoff of surface
                               31             waters;
                               32          • Mudslides or mud flows on the surface of normally dry
                               33             land areas; and
                               34          • The collapse of a shoreline if caused by abnormal waves or
                               35             currents.

                               36       The definition of a flood does not include water damage that
                               37       might occur because of broken pipes, sewer backup, basement
                               38       foundation seepage, or a leaky roof.

                                      Flood insurance                                            10-7

                Misc. Flood
             Insurance Points

Coverage begins 30 days after the application for a policy. Why           1
the delay? Because floods, unlike tornadoes, usually do not drop          2
down out of nowhere. For days or sometimes even weeks before              3
high water arrives, it may be obvious that a flood may occur. It          4
doesn’t take much imagination to visualize hoards of uninsured            5
people lined up to buy a policy as the water rises around their           6
ankles. So, the 30-day waiting period was instituted to encour-           7
age people to buy insurance long before a problem arises. But if          8
the property is being sold there is a provision that allows for the       9
Flood Insurance to become effective immediately upon transfer             10
of ownership.                                                             11

Each portion of the policy – building and contents – has its own          12
deductible, and each deductible is applied separately in determin-        13
ing a settlement. This means that if you make a claim for dam-            14
ages to a building, the deductible will be subtracted from the full       15
loss before a benefit is paid. And if you also file a claim for dam-      16
age to the building’s contents (for the same flood), the deductible       17
amount will again be subtracted from the benefit amount. The              18
minimal Flood Insurance deductible is $500 ($500 for building             19
and $500 for contents). The Insured can
choose to carry higher deductibles.                         Test Tip...
As communities meet the flood-prevention          Flood Insurance usually becomes effective 30
                                                  days after application.
goals laid out for them by the NFIP, the
rates that Insureds pay for their insurance
are adjusted to reflect the reduced risk. A standard premium may           25
be discounted upon a community’s successful completion of a                26
Flood Control Program.                                                     27

Although both attached and detached carports are excluded, the            28
Flood Policy for the single family home offers some coverage for          29
a detached garage. That coverage is limited to 10 percent of the          30
total coverage.                                                           31

         The Simpson family has a Flood Policy with a maximum             32
         policy amount for a single family home of $250,000.              33
         Of that $250,000 of coverage, up to $25,000 may be ap-           34
         plied to cover the Simpson family’s detached garage.             35
         The policy will not, however, pay more than the                  36
         $250,000 limit.                                                  37

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                                1       With one exception, settlement for all NFIP claims is on an
                                2       Actual Cash Value (ACV) basis. The only exception is an owner-
                                3       occupied single family dwelling, for which the settlement will
                                4       be based on a replacement cost basis (provided the home was
                                5       covered for at least 80 percent of its replacement value or for
                                6       the maximum amount allowed by the program). Even then, the
                                7       detached garage is covered on an ACV basis.

                                                               Flood Insurance Policies are unique in that
                 Test Tip...                                   there is no coinsurance requirement. The
         Flood Insurance policies do not contain a coinsur-    policy will fully cover partial losses up to
         ance provision.                                       the policy limit regardless of whether the
                                                               property was covered to full value.

                                                              Winding Up

                               13       A major goal of the NFIP is to get communities to work toward
                               14       flood prevention. Providing insurance to residents is an excellent
                               15       way to entice local governments to participate. But what incen-
                               16       tive does an individual have to buy insurance? Won’t the Feds
                               17       just come along anyway after a flood and make everything right
                               18       again? Not necessarily!

                               19       Knowing that some folks might not buy Flood Insurance and
                               20       might choose instead to rely on federal generosity, the NFIP
                               21       created a penalty for the uninsured. If a property owner in a
                               22       participating flood-prone community does not buy Flood Insur-
                               23       ance within one year after it becomes available, that person will
                               24       not be eligible for full disaster relief assistance if such money is
                               25       provided after a flood. Specifically, the amount of assistance that
                               26       might otherwise be available to such a person will be reduced by
                               27       the amount of Flood Insurance the property owner could have
                               28       purchased.

                               29       Now we move on to the next chapter to look at how we might
                               30       cover another exclusion - the earthquake.

                                            Flood insurance                                       10-9

Quick Check...
Key Terms and Concepts:

   Flood 10-6                                                “Write Your Own” Program 10-3
   National Flood Insurance Act 10-2                          Flood Control Program 10-4
   National Flood Insurance Program (NFIP)      10-2          Emergency Program 10-4
                                                              Regular Program 10-5

   • Although Flood Insurance may be sold either by the government or by a private company, it is
     underwritten by the federal government through the National Flood Insurance Program (NFIP).

   • Before a property owner may purchase Flood Insurance, the community must agree to participate
     in the NFIP. Community participation includes taking action to prevent future flood damage.

   • Any home or business in a participating community is eligible to purchase Flood Insurance.

   • Upon application to participate, a community will be placed in the NFIP’s Emergency Program.
     Once the community study and mapping are complete, the area will move to the NFIP’s Regular
     Program. The major coverage difference between the two is that the Regular Program has higher
     policy limits.

   • Coverage for buildings and coverage for the contents of buildings are purchased separately and
     each has its own deductible.

   • Coverage usually begins 30 days after applying for a policy.

                                                 And now we can move on...

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