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Flooding is one of the most common natural disasters and one of the most destructive. Despite the risks, however, flood insurance remains a largely untapped form of coverage – even for high-income households. Throughout the United States, nine out of ten homes are not protected against floods. The highest take up rate for flood insurance is currently in Florida, where homeowners also face a higher-than-average likelihood of flood loss, yet only 13% of Florida households have flood insurance. That leaves nearly 10 million homes at risk in the Sunshine State alone.
Unfortunately, floods are occurring more frequently, even in areas and states that haven’t historically experienced them. According to NOAA, flooding causes more damage than any other type of weather event in the US and can occur in all 50 states, any time of year. There are three common types of floods – flash floods from extreme rainfall events, river floods from when the water level of a river, lake or stream overflows onto adjacent land and property, and coastal flooding from extreme tides and/or storm surges. Given the increasing prevalence and risk of flooding, homeowners should take a fresh look at their specific flood risk and consider how flood insurance can be incorporated into their overall risk management strategy.
Surprisingly, many property owners often lack flood insurance coverage because they either assume flood coverage is already included in their standard homeowner's policy, or they assume their property is not at risk for flooding. While homeowner's insurance policies typically cover water damage from things like burst pipes and broken water heaters, these policies do not cover flood damage resulting from heavy rainfall, storm surges, melting snow, or other natural storms or events.
Many homeowners greatly underestimate the risk, feeling they do not need flood insurance in their geographic location. Interestingly, 25% of all flood claims come from low- to moderate-risk areas. Additionally, climate change is making flooding more common and more severe, as well as causing floods in areas that are not historically prone to them.
Since 1980, there have been 332 billion-dollar natural disasters, which in total have cost more than $2.2 trillion and took the lives of more than 15,000 people. Almost 40% of those billion-dollar disasters occurred in the 2010's (2010 to 2019), and the upward trend continues in the 2020's. These 300+ major disasters include 160 severe storms, 57 tropical cyclones or hurricanes, 36 floods, 30 droughts, 20 wildfires, and 29 winter storms or freezes. It is predicted that in the years to come, many more properties will sustain damage from floods and other natural disasters as the frequency of extreme weather events continues to increase.
According to the National Flood Insurance Program (NFIP), the rate of flood claims between 2010 and 2019 is double that of what was seen in the 1980’s, and more than 75% of all flood claim payouts by the NFIP have occurred in the last 20 years (1978-2021). There is no doubt flood risks and flooding events are on the rise.
Given the increased frequency and risk of flood damage, homeowners need to understand the various flood insurance options that exist within the marketplace, as well as the pros and cons of each. Here’s a breakdown of the three types of flood insurance available:
NFIP – FEMA manages and administers the National Flood Insurance Program (NFIP), which enables property owners to purchase insurance against losses from flooding at a reasonable cost. Unlike private policies, policies issued by NFIP cannot be canceled at renewal by NFIP, giving the current homeowner lifelong coverage as long as the premium is paid each year. NFIP coverage requires an elevation certificate to purchase the policy, and only offers a dwelling coverage limit of up to $250,000, with a $100,000 limit for personal property. Once a premium payment is made, there is a 30-day waiting period before coverage begins. NFIP policies only pay out when a flood event affects multiple properties or covers two or more acres. If a flood does not meet this threshold, coverage is not available.
Private Market– Private flood coverage is written by insurance companies that are not part of the federal government flood program. In recent years, more carriers have entered into this private flood insurance marketplace. There are several key differences between the NFIP program and private flood insurance, including many benefits. Private policies can have coverage limits of up to $5 million and may not require an elevation certificate. Unlike NFIP policies, private insurance can include loss-of-use coverage and added coverage for things like finished basements, pools, and detached structures. Additionally, the waiting period under a private flood policy is usually 15 days or less, with some carriers offering immediate coverage. Private policies also have a broader definition of covered loss and do not require the flood to cover a certain amount of acreage or properties to be paid out. It is important to know that unlike NFIP policies, which cannot be canceled at renewal, private flood policies can be canceled at renewal at the discretion of the insurance company and their changing appetite for risk.
Excess Flood Insurance – Excess flood insurance policies cover over – in excess of – primary flood insurance policies. Excess policies can extend over NFIP policies or over private flood insurance policies. For high-value homes, excess flood insurance can be a wise option to consider as it offers higher limits than primary flood insurance, especially if covering over a NFIP flood policy which only covers up to $250,000.
Homeowners need to be aware of increasing flood risks and should understand the flood insurance options available to them. While flooding risks are typically highest in coastal and waterfront areas, and especially high in flood prone states such as SC, NJ, LA, TX, CA, and FL, all properties and homeowners have some degree of flood risk and exposures.
With the frequency, severity, and cost of flooding events expected to continue to increase, all homeowners should at least consider adding flood insurance coverage to their risk management program. Homeowners should also review all their insurance policies annually with a private client specialist to ensure they have the right coverages in place.
To learn more about flood insurance solutions and how successful families and individuals can best protect their properties, reach out to the Risk Strategies Private Client Services team.
Graham has more than three decades of insurance industry experience, with a focus on leading teams and developing customized solutions for high-net-worth clients. At Risk Strategies, Charlie Graham is responsible for the leadership of our Private Client Services practice in New England. Charlie believes flood insurance is an important consideration for all clients.