Flood Insurance: What Homeowners, Renters Still Need to Know

Hurricane Irene flood insurance

A picture of Hurricane Irene’s flood damage.

Thanks to so-called “storms of the century,” like Irene and Sandy, homeowners and renters currently know a lot more about flood insurance. For example, a Bankrate survey found that 81% understood that standard policies exclude flood coverage. That is a special kind of protection. Although it is only provided by the federal National Flood Insurance Program (NFIP), it is available through commercial insurance agents. That is mandatory for those with federally backed mortgages who are based in zones designated by the Federal Emergency Management Agency (FEMA) as a Special Flood Hazard Area (SFHA).

However, as with much of insurance, which is a complex topic, there remain huge information gaps. This can present a major challenge in managing personal finance. That is because FEMA documents that floods are the top national disaster and they occur in all states. While homeowners and renters may fear fire, there is a greater possibility that they will be victims of flooding.

The most common knowledge deficit is about how much coverage is provided and for what. Yet this is what must be factored in before purchasing property in a high-risk flood area. FEMA makes those designations. Those rankings are available at floodsmart.gov. Federal flood insurance is only available for up to $250,000 for damage to the building and $100,000 for contents. Private insurance can supplement that, but it is expensive. That means that buying a million-dollar home in such an area could mean financial ruin if there is a major flood. In addition, buyers might think twice about investing in sprucing up the basement. Insurance does not cover any renovations done below ground.

The story about content can be equally chilling. What is in the basement probably will not be covered. That ranges from the entertainment center to the equipment for the home office down there. As for the content in the rest of the owned property or rental, the news is not good either. The terms and conditions about reimbursements for content are based on “actual,” not “replacement” value of content. Given depreciation, the current fair value of a sofa may be $150. But it could cost $1,100 for a comparable piece of furniture.

A third sobering reality, which homeowners and renters might not know, is that flood policies do not pay for alternate living expenses. If the primary residence has been waterfront property in an expensive area like New York’s Hamptons, then shelling out for hotels and rentals will also be high. That means homeowners could be hit twice. Once would be through the loss of their property. The second hit would be through having to shell out ongoing lodging expenses.

A fourth not well-known fundamental about flood insurance is the likelihood that it will be needed. According to FEMA, 25% of flood claims are made by those in low- to moderate-risk areas. Here there is good news. Because of the reduced risk, there are preferred-risk policies with lower premiums. For homeowners they start at $129 for property and contents, and for renters for contents only at $49. Being on a high floor also does not protect from flooding. The flood can destroy pilings. The whole edifice could collapse. Therefore condo and co-op owners would be out the value of both their property and content.

Weather experts continue to disagree if there is global warming or the beginning of a mini-Ice Age. However, what is certain is that during the past several years there have been unusual weather events. Some of them caused flooding. The future cannot be predicted by the past. But, the risk of a flood seems higher for all parts of the nation than it had previously. It seems especially high for areas near the water and low-lying regions.

Photo credit: DVIDSHUB / Foter / CC BY

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