10 Chapter 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. AmericasProfessor.com #1 in Online Exam Prep 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. americasprofessor.com 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 AP People Pass! 10-4 Property 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. americasprofessor.com 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. includes: 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 AP People Pass! 10-6 Property 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. americasprofessor.com 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 AP People Pass! 10-8 Property 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. americasprofessor.com 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... AP People Pass!
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