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Flood insurance basics: Nine quick facts

September 26, 2017

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This year it's more important than ever that business journalists know the basics about flood insurance. (Image by "patrick269" via Pixabay, CC0 Creative Commons)
This year it's more important than ever that business journalists know the basics about flood insurance. (Image by "patrick269" via Pixabay, CC0 Creative Commons)

Thanks to Harvey, Irma and now, Maria, flooding caused by hurricanes has dominated the news for weeks. Flood insurance is a hot topic both for readers in typical flood areas and for those in heretofore safe zones. Get a handle on the facts before jumping into a story.

Impact on the U.S.

According to the Federal Emergency Management Agency, floods are the number one natural disaster in the United States. These graphics on the FEMA website show how dangerous flooding is.

Hurricanes, flood damage and budget strain

Hurricanes this year have cost the U.S. billions of dollars in damage. The brunt of that cost can be attributed to uninsured homeowners. While there is a disaster relief contingency built into the FEMA budget, widespread flooding from hurricanes can put a strain on this. FEMA funding accounts for over 21 percent of the Department of Homeland Security Budget.

Limits of a homeowner’s policy

A homeowner’s policy does not protect against flood damage. Private insurance companies did insure flooding damage until the 1960s. Now they are an additional policy under flood insurance.

Who is most in need

People who live in low-lying areas next to water—also known as “floodplains”—need flood insurance. Most purchase flood protection through the National Flood Insurance Program (NFIP) managed by the federal emergency management agency (FEMA).

Federal flood insurance roots

A briefing from the National Association of Insurance Commissioners and the Center for Insurance Policy Research explains that the NFIP was established in 1968 because there were not enough providers covering flooding. It also came in response to increasing use of federal disaster funds for flooding. It’s up for renewal at the end of September.

The future of federal insurance

The question today, as it becomes apparent that many people still don’t have flood insurance, is whether or not this component of FEMA has been successful. According to a Bloomberg article, as of April, in Houston’s Harris County, which was hit hard by Hurricane Harvey, less than one-sixth of homes had federal coverage.

Definition of damage

Know how insurance companies define various types of damage, especially wind damage and flood damage. Home-owner’s insurance usually will cover wind damage, but not flooding. Page one of this NFIP summary of coverage features a definition of a “flood.”

Contents coverage comes at a cost

Anyone who purchases flood insurance should understand that coverage for the contents of a home or business must be purchased separately. Contents coverage can be added to coverage from the NFIP, Allstate and a few others.

Coverage has a limit

Unlike some insurance, flood insurance does not necessarily cover the cost of rebuilding a home. It is not a guaranteed replacement cost policy. For example, a homeowner incurring $200,000 in damages with a $100,000 plan will have to pay the other half out of pocket. Read a summary here. A detailed explanation of what is covered under the National Flood Insurance Program can be found here.

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