Amanda L. Grossman and her husband noticed that after a torrential downpour, a corner of their living room floor had become somewhat sponge-like. Water had managed to make its way under the ground beneath their patio and into the flooring of their home.
They purchased flood insurance even though they weren’t required to opt for a policy. Their two-story, four-bedroom home in Houston, Texas, however, wasn’t part of the high-risk flood plain.
After paying a $1,000 deductible and deducting about $400 for depreciation, their claim to replace the entire living room floor was nearly $5,000.
“I was really impressed with the claim we filed,” says Grossman, who is 36, a personal finance writer, and CEO of FrugalConfessions.com and MoneyProdigy.com.
“I’ve heard of horror stories from others who flooded their entire homes, and how it was so hard to get through the logistics as well as the heartbreak they had to endure in losing their home and belongings. We were fortunate that the claim was a small one – and that might be why it was so easy to do.”
Curious about what flood insurance is, how it works, and whether you need it? Let’s dig in:
What is flood insurance?
Most homeowners, renters, or commercial property insurance policies doesn’t cover damage done by flooding.
That’s why you’ll need to purchase additional insurance just for floods and flood-related damage.
If you live in a designated flood zone, you’re required to get coverage.
Flood insurance covers damage and losses caused by floods. For a natural disaster to be considered a flood, it has to affect either two acres or two properties.
It also covers losses and damage from flood-related erosion caused by the following:
- Heavy or prolonged rain
- Coastal storm surge
- Melted snow
- Storm drainage systems that are blocked
- Levee dam failure
When filing a claim for flood insurance, what causes the flooding matters. If the damage was caused by sewer backup, it’s only covered if the sewer backup was directly caused by flooding.
Flood insurance covers a lot, but there are some exceptions:
- Damage caused by moisture, mildew, or mold that could have been prevented by the property owner
- Property and belongings outside like trees, fences, and swimming pools
- Living expenses such as temporary housing
Types of flood insurance
With flood insurance, you can get coverage for your home, your personal belongings, or both.
There are two main types of flood insurance you can purchase from the National Flood Insurance Program (NFIP). You can choose to buy a policy to protect your personal property as well as your commercial property.
1. Personal home property
For your home, you can insure both the structure as well as your belongings.
Homes are covered up to $250,000 and on a replacement basis. The physical structure, foundation, electrical and plumbing systems, and detached garage are all covered. Replacement cost coverage means you’ll receive a payout to rebuild the structure in the shape it was pre-damage.
For personal belongings, you can get coverage for up to $100,000 on an actual cash value basis. Things like your furniture, clothes, electronics, and certain valuables will be covered. Note: if your basement gets flooded, the coverage for its contents is limited.
For a payout of actual cash value, it’s the replacement cost, but minus the depreciation in value of the structure over time. (You can learn more about actual cash value vs replacement cost here.)
If you need protection that goes above and beyond the standard NFIP coverage, excess flood insurance is also available. This coverage is also for those who live in an area that isn’t covered by the NFIP.
Your car is not covered under flood insurance. If you have comprehensive insurance on your policy, your car will be covered. The insurance company will pay for repairs or for total loss.
2. Commercial property
Similar to coverage for personal property, business flood insurance is also available.
Like with personal property, if you have a mortgage that’s backed by a federally regulated lender or live in a high-risk flood area, you’ll be required to have flood insurance on your commercial property.
If your building or inventory is damaged by say, water overflowing from a nearby creek, or melted snow through the gutter, your building will be covered.
Also property that’s located outside your building, such as landscaping or patio furniture, won’t be covered.
Coverage limits for commercial property is higher than personal property: $500,000 for both the building and for its contents, which might include equipment, supplies or inventory housed inside.
Do I need flood insurance?
In most cases, you’re required to be covered by flood insurance if your home has a mortgage that’s backed by a federally regulated lender, or is in a high-risk flood area.
With the average food claim payout at $43,000, it’s worth it to pay $700 a year for flood insurance. Since most homeowners and renters insurance policies don’t cover damage by flooding, it’s best to protect your place and belongings with flood insurance.
You never know when a flood will hit and living outside of a high-risk flood zone doesn’t provide protection for your home and your car. If you do decide to purchase a policy, make sure you do it sooner than later. With the 30-day waiting period, you want it to be effective when a storm hits.
How to purchase flood insurance
When it comes to buying a flood insurance policy, it works a little differently than other types of insurance. That’s because flood insurance is subsidized by the government.
The NFIP, which is administered by FEMA, was created to provide taxpayers relief for the ever-increasing severity of damage caused by floods.
While the government underwrites flood insurance policies, you can purchase it through private insurers.
Bear in mind that your community must participate in the NFIP. Rates for flood insurance offered by the NFIP is the same no matter where you purchase it.
If for any reason you’re having trouble finding an insurer to purchase flood insurance, you can contact the NFIB directly for assistance: (888) 379-9531.
What factors affect your flood insurance premium?
The average premium of a flood insurance policy is $700 a year. This number can vary, and the rate depends on a risk assessment.
Your premium is affected by the coverage limits you choose as well as your deductible.
But it’s also based on your home’s flood risk, number of floors in your home, the location of the lowest floor in relation to the Base Flood Elevation, and year of construction. And if you live in a condo, the building occupancy will also come into play.
When to purchase flood insurance
Usually there’s a 30-day waiting period before coverage from your policy kicks in. So the sooner you purchase it, the better.
There are a handful of exceptions on the 30-day waiting period:
- If the building is now designated in what’s called a Special Flood Hazard Area (SFHA). Or if you purchased a flood insurance policy within 13 months after the map has been revised, the waiting period is only one day.
- If purchasing a policy is tied to a mortgage — creating, renewing, extending, or increasing — there’s zero waiting period.
- In the event that you selected flood insurance as an add-on to your existing insurance policy, there’s no waiting period.
Misconceptions about flood insurance
While more people are purchasing flood insurance policies, there are still misperceptions and myths about flood insurance.
1. Only homeowners can get flood insurance
Flood insurance is also available for commercial property and businesses.
2. Flood insurance isn’t worth it
According to FEMA, floods are the most common and expensive natural disaster in the U.S. They cause, on average, $8.2 billion dollars a year.
What’s more, according to data compiled by the NFIP, flooding has happened in 98 percent of counties, and more than 20 percent of claims are from outside high-risk flood zones.
It turns out that a single inch of water inside your home or business could mean $20,000 in damages.
3. You don’t need flood insurance because you can get assistance from FEMA
Although FEMA might be able to provide assistance for your situation, it’s only in the case where you’ve lost your home from a disaster that has been declared as such by the president. But with flood insurance, you can file a claim that isn’t a presidential-declared disaster.
You can file claims for mold/mildew that was a result of flooding, for damage from water from a steep hill, and damage from a dam levee.
Businesses and second homes affected by disaster aren’t eligible to receive help from FEMA.
Businesses that suffer damage from a flood can apply for the FEMA loan program. But the average wait time is two years.
