Flood Insurance 101
As of March 23, 2023, there are about 22,600 communities participating in the National Flood Insurance Program (NFIP). To do so, the NFIP partners with nearly 60 insurance companies to sell policies across the country.
What to ask
What is the National Flood Insurance Program (NFIP)?
A federal program created by Congress in 1968, that aims to reduce the impact of flooding across the country. It does so by providing flood insurance to property owners who live in communities that adopt and enforce floodplain management standards.
The NFIP is designed to provide an insurance alternative to disaster assistance to meet the rising costs of repairing flood damage to homes, businesses, and belongings.
What is NFIP's Pricing Approach?
FEMA has updated the National Flood Insurance Program’s pricing approach, Risk Rating 2.0, as of April 2021. This pricing approach leverages industry best practices and cutting-edge technology to enable FEMA to deliver rates that are actuarially sound, equitable, easier to understand, and better reflect a property’s individual flood risk.
Why should I talk to my clients about flood insurance?
Clients are encouraged to purchase flood insurance to protect their properties from the financial losses that come with flooding.
A property does not have to be near water to flood. Between 2015 and 2019, more than 40% of all NFIP flood claims come from outside of the high-risk flood areas, known as the Special Flood Hazard Areas (SFHAs).
Floods can result from:
Storms
Melting snow
Hurricanes
Drainage system backups
Broken water mains
Changes to land from new construction
It’s also important to let your client know that most homeowners insurance policies do not cover flood damage.
In the event of flood, federal disaster assistance offers very limited assistance with strict eligibility requirements. Additionally, most federal disaster assistance comes in the form of loans that recipients must repay—with interest. Your clients will never have to repay money received from a verified claim on their NFIP flood insurance policy.
Who can purchase flood insurance?
Property owners and renters in a community that participates in the NFIP can purchase coverage, including:
Owners of buildings under construction
Business owners
Condominium associations
Owners of residential condominium units in participating communities
Those who are not eligible include:
Coastal Barrier Resources System Areas (CBRS)
Undeveloped coastal areas established for wildlife refuge, sanctuary, recreational, or natural resource conservation purposes
Buildings below ground or entirely over water
Who is required to purchase flood insurance?
Mortgage holders in high-risk areas.
Per the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994, homes and businesses in high-risk flood areas (SFHAs) with mortgages from federally regulated, supervised, and insured lenders are required to have flood insurance. And if federally required, the insurance payment must be es-crowed. While flood insurance is not federally required if your client lives in a moderate- to low-risk flood area, a lender may still require them to have insurance.
Lenders typically require only the amount of the loan (up to the NFIP maximum) which could be less than the value of the home. If this amount is chosen, the client may be under-insured. Review their coverage's carefully with them and have them sign a declination form if they want only what the lender requires.
Previous recipients of disaster assistance.
Those who live in a high-risk flood area and have received federal disaster assistance following a Presidential Disaster Declaration must maintain flood insurance to be considered for any future federal disaster aid.
When is the best time to buy flood insurance coverage?
The best time is now! Floods do not happen just during a specific season but can happen anywhere, at any time—even outside of the high-risk flood areas.
There is typically a 30-day waiting period between submitting the policy application and the effective date. If clients wait until severe weather arrives, it is likely already too late.
Exceptions to the 30-day waiting period:
If flood insurance is purchased in connection with making, increasing, extending or renewing your mortgage loan
If additional insurance is selected as an option on your insurance policy renewal bill
If a building is newly designated in the high-risk area (SFHA) and flood insurance is purchased within the 13-month period following a map revision
If a property is affected by flooding on burned federal land and the policy is purchased within 60 days of the fire-containment date, there may be no waiting period. Waiving of the waiting period is determined at the time of claim.
How to obtain a flood insurance policy and how much will it cost?
The NFIP encourages customers to reach out to agents directly to purchase flood insurance.
Customers can purchase NFIP flood insurance from the more than 60 insurance companies writing and servicing flood insurance on behalf of FEMA, or from agents working with NFIP Direct. Regardless of who writes the policy, NFIP flood insurance is the same. The premium and amount of coverage is the same regardless of the agent or insurance carrier.
What does flood insurance cover?
Contents and building coverage are purchased separately, with separate deductibles. Building coverage only covers the building’s structure, while contents coverage protects the contents of a building.
Resource
Federal Emergency Management Agency (FEMA)