Demystifying Flood Insurance

The past week has seen devastating floods wreaking havoc here in New Jersey and New York. The president has had to direct federal aid after the deadly flooding that has left more than 50 people dead across six New Jersey counties and five New York counties. These are the repercussions of Hurricane Ida. According to reports, many people were trapped in fast-filling basement apartments, cars, or swept away as they tried to escape. The terrible storm also spawned several tornadoes.

Jersey City Mayor Steven Fulop says the damage to the city’s infrastructure is estimated at $35 million and that looks set to rise. Kathy Hochul, New York’s Governor, said an assessment found that the storm damaged more than 1,200 homes and caused $50 million in damage to property and public infrastructure. One can only imagine how much damage has been caused to homes, cars, shops, and other assets. Freak storms and floods like these are truly devastating.

Sadly, these are no longer uncommon. Throughout the decades, NJ has experienced Superstorm Sandy, Tropical Storm Irene, the Raritan River Flood, and more. Each has been difficult to cope with in its way. Keeping all this in mind, it only makes sense for people who live in these areas to take on flood insurance to protect themselves. What exactly is flood insurance? Allow us to explain.

Flood Insurance

The first question on your mind is probably – what exactly is flood insurance? Simply put, flood insurance is a type of property insurance that covers a dwelling for losses sustained by water damage. That damage has to be specifically due to flooding caused by heavy rain, melting snow, coastal storms, blocked storm drainage systems, or dam failures. In several places, a flood is considered a major event. The damage one causes are irrecoverable if one doesn’t get supplemental insurance.

Flood insurance policies are available for both residential, commercial properties and business owners. The federal National Flood Insurance Program (NFIP) offers flood insurance to homeowners in certain participating communities. It’s also available to those who are in the NFIP-designated floodplains. The pricing of each policy is based on the government-designation flood zone upon which the property is located. There are other factors considered as well, such as the age of the property, its elevation, and the number of floors. The average cost of flood insurance is $700, but the final amount can vary significantly.

How Does Flood Insurance Work?

Flood insurance is a type of catastrophe insurance. It’s different from a basic hazard insurance coverage that is included in a homeowner’s insurance policy. Your standard homeowner’s insurance could cover interior water damage due to a burst pipe or weather events like tornadoes. These don’t usually cover destruction or damage caused by floodwaters or flash floods. Property owners who live in an area prone to such natural disasters should get this special coverage.

Like other insurance policies, flood insurance works when the home or property owner pays a premium annually to the insurance company. This will be based on the property’s flood risk and any deductible they select. If the property or its contents are damaged or destroyed by flooding due to external phenomena such as rain, storms, snow, or collapsed infrastructure, the property owner will receive a claim. This will be equal to the amount of money needed to fix the damage or rebuild the structure (up to the policy limit).

Unlike your usual homeowner’s policy, flood insurance requires the policyholder to buy separate policies that cover a dwelling and its contents. A different coverage rider is needed to cover sewer backup if it wasn’t caused by rising floodwaters.

The National Flood Insurance Program

The NFIP is managed by FEMA, and it offers flood insurance to homeowners in certain areas. These two bodies work together to keep up-to-date maps of all the flood zones in the U.S. These zones are broken up into subsections that are then rated. Properties located in the B, C, and X zones run a moderate to low risk for flooding. Those located in zones designated with an A are high-risk. These are then broken down, and given attributes based on the potential of floodwater, their heights, and estimations based on how frequently they can occur throughout a 30-year-mortgage. Another high-risk area is designated with a V.

Zone D indicates areas where experts have not yet made a decision. These maps are constantly updated to change along with altering weather patterns and environmental changes, including the building of dams and levees.

Private Carrier Options Are Available

While the government offers the NFIP, there are private entities that offer flood insurance policies as well. This will depend on which zone you live in. If you live in a Special Flood Hazard Area (SFHA), buy a policy through a private insurer that will comply with both federal mandates and your mortgage requirements.

  • Private flood insurance policies often offer a higher coverage than the federal version. This is usually the case when your property is in a low-risk area. That is generally recommended for those who possess homes valued over $250,000, plus other possessions. 
  • Private flood insurers also often provide coverage for a higher number of possessions. That’s helpful if you have personal belongings that floods can destroy although make sure to check the details of the policy since there is far less coverage provided in basements then in upper levels plus the flood zone you are in will impact the exact coverages provided. A private company would be able to rearrange these limits to match what you have at home.
  • Private insurers also may pay for living expenses in case your home becomes uninhabitable. Regular homeowners’ insurance policies cover this but not for flood insurance related events plus the government’s flood insurance program does not cover this.
  • Therefore, private flood insurance can be less expensive for many homeowners. For instance, according to a paper, 77% of single-family homes in Florida could see cheaper premiums with private insurance. That’s the same for 69% of Louisiana households, and 92% of those in Texas.

Why Should You Get Flood Insurance?

The whole country is a floodplain – and some areas have a higher risk of flooding than others. Around 80% of homes that were damaged during Hurricane Harvey didn’t have flood insurance and from that lot, 65% weren’t even in a high-risk flood zone. After what we saw recently with Hurricane Ida, we now know that every single property is susceptible to flooding. Therefore, all property owners can benefit from learning more about flood risks and insurance.

The Risks are Greater Than People Think

Just an inch of floodwater can cause damage of over $25,000 to a home. A FEMA grant alone won’t be able to cover the costs of rebuilding the damaged property. A disaster grant from FEMA will give food and shelter directly after a flood, but flood insurance goes a few steps ahead by giving you the resources to rebuild your home.

The Cost of Flood Insurance

The NFIP decides the pricing of these policies. If you live in a flood zone or in a community that participates in the NFIP, the body will find you an insurance agent. Your policy’s price will depend on the location, age, and structure of your property. How close is it to a water body? What is its elevation? What would the replacement or actual cost value be? All these factors, and more, go into deciding the price of your policy. Lower-cost policies that provide both building and contents coverage for those in moderate-to-low-risk zones for one price are also available. Certain communities can avail of discounts under the NFIP. These factors are why annual premiums can greatly vary.

The average annual cost of an NFIP policy is $699 according to national statistics. The maximum coverage available for businesses under the NFIP program is $500,000 in-building coverage and $500,000 in contents although there are plenty of private carriers that can provide limits in excess of the NFIP maximum limits. You can also seek out coverage by yourself. That’s more suitable for those who want to insure their property for a larger amount. Individuals usually seek flood insurance from the same agent they’ve issued their regular homeowner’s policy from although if your agent has not offered this valuable coverage then it might be time to get a second opinion.

Today more than ever we’ve realized the importance of keeping such policies in place as safety nets. While the government and the people battle it out with Mother Nature, we can only hope that these hard times will pass soon. Till then, everyone should keep a low profile and stay safe. But after the storms pass, it’s of paramount importance that you get flood insurance to safeguard yourself.