Flood Insurance
Flood Insurance
What Is a Flood?
A flood is a great flowing or overflowing of water, especially over land areas that are normally dry. NFIP flood insurance policies use a more specific definition.
Flood is a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (one of which is your property) from one of the following:
Overflow of inland or tidal waters
Unusual and rapid accumulation or runoff of surface waters from any source
Mudflow
Collapse or subsidence of land along the shore of a lake or a similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above
A water event that does not meet this definition is not, for purposes of the National Flood Insurance Program (NFIP), a “flood.”
There are several types of flooding.
Coastal flooding occurs when hurricanes and storms produce heavy rains or drive ocean water onto land. Storms, earthquakes, and volcanoes can create tidal waves that produce coastal flooding. The force of the water from tidal waves often sweeps away beaches and houses.
River flooding is normally seasonal because of snowmelt or heavy rains. Water fills the river basin too quickly, and the river flows over its banks. Water then covers the floodplain, often damaging homes, and other property.
Flash flooding is caused when small and powerful fast-flowing rivers are quickly formed because of excessive rainfall or dam failure, sometimes triggering catastrophic mudslides. Flash floods can be powerful enough to carry away roads, bridges, and other structures, and they can occur with little advance warning.
Loss Control Measures
Floods cause major water damage to homes, and they can cause walls and entire buildings to collapse. Many homes caught in a flood are total losses. Property owners can take various measures to protect their homes and businesses, including the following:
Elevate the structure.
Relocate the structure.
Relocate or elevate electrical panel boxes, furnaces, washers/dryers, and water heaters to a location less likely to be flooded.
Seal the structure.
Need for Flood Insurance
Most property insurance coverage forms exclude flood coverage. (Notable exceptions include auto insurance policies and inland marine floaters, which often include flood coverage.) Since most property forms do not typically cover flood losses, all property owners should seriously consider procuring separate flood insurance.
Flooding and Probability
Many locations have a 1 percent or more probability that that location will experience a flood in any given year. It’s important to understand exactly what this means and what it doesn’t mean.
A 1 percent probability is the same as saying they can expect 1 flood every 100 years on average in the long run. This is no guarantee that the property will not have 2 or more floods within a 2- or 3-year period or even within the same year.
Why Flood Insurance Is Better Than Disaster Assistance
Disaster assistance might become available, but it is available only if a disaster is federally declared. When it is available, assistance is usually a loan that must be repaid in full with interest. Flood insurance, however, indemnifies the insured for covered losses—even when a disaster is not federally declared.
National Flood Insurance Program
The National Flood Insurance Act of 1968 established the NFIP as a federally funded and operated program. Flood insurance is available from the NFIP, which is administered by the Federal Emergency Management Agency (FEMA).
The National Flood Insurance Act was amended in 1969 to provide coverage for mudslides. A 1973 amendment required mortgage lenders, in most cases, to ensure that floodplain property was covered by flood insurance. 1994 legislation tightened the enforcement of flood insurance requirements.
The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters)3 made further modifications to various aspects of the NFIP. But in passing the Homeowner Flood Insurance Affordability Act of 2014, Congress rescinded some of the changes that Biggert-Waters had called for.
NFIP Coverage Forms
There are three different NFIP coverage forms:
The dwelling form can be used to cover one- to four-family dwellings. It cannot be used for residential structures with five or more residential units.
The general property form covers other residential buildings of five families or more and non-residential buildings. This flood form ensures most businesses.
The residential condominium building association policy (RCBAP) provides coverage for the condominium association, not individual unit owners. This policy covers the common elements and all structural items of the residential condominium units within a building. It also covers personal property owned by the condominium association.
Flood Insurance Rate Maps (FIRMs)
A FIRM is an official map of a community on which the FEMA has delineated the SFHAs, the base flood elevations (BFEs), and the flood zones applicable to the community.
Base Flood Elevation (BFE)
The BFE is the elevation of surface water resulting from a flood that has a 1 percent chance of equaling or exceeding that level in any given year. The BFE is shown on the FIRM zones AE, AH, A1–A30, AR, AR/A, AR/AE, AR/A1–A30, AR/AH, AR/AO, V1–V30, and VE.
In essence, the BFE outlines the border of the 100-year floodplain. The property below this line is in the 100-year floodplain, also known as the Special Flood Hazard Area (SFHA); the property above this line is not. However, property outside the 100-year floodplain is not immune from flooding. It only means that the probability of a flood is a bit lower. Over the past decade, approximately 20 percent of all NFIP claims came from properties in low- to moderate-risk areas.
Flood Zones
Flood maps of communities that participate in the NFIP indicate the degree of flood hazard in various specific areas referred to as zones.
Special Hazard Flood Areas (SFHAs) are defined as the areas that will be inundated by the flood event having a 1-percent chance of being equaled or exceeded in any given year. The 1-percent annual chance flood is also referred to as the base flood or 100-year flood. SFHAs are labeled as zones A, AO, AH, A1–A30, AE, A99, AR, AR/AE, AR/AO, AR/A1–A30, AR/A, V, VE, and V1–V30.
Moderate flood hazard areas, labeled Zone B or Zone X (shaded) are also shown on the FIRM and are the areas between the limits of the base flood and the 0.2-percent-annual-chance (or 500-year) flood. The areas of minimal flood hazard, which are the areas outside the SFHA and higher than the elevation of the 0.2-percent-annual-chance flood, are labeled Zone C or Zone X.
Definitions of FEMA Flood Zone Designations
Flood zones are geographic areas that FEMA has defined according to varying levels of flood risk. These zones are depicted on a community’s FIRM. Each zone reflects the severity or type of flooding in the area.
Moderate- to Low-Risk Areas
In communities that participate in the NFIP, flood insurance is available to all property owners and renters in these zones:
ZONE DESCRIPTION
B and X (shaded)
Area of moderate flood hazard, usually the area between the limits of the 100-year and 500-year floods. Are also used to designate base floodplains of lesser hazards, such as areas protected by levees from 100-year flood, or shallow flooding areas with average depths of less than one foot, or drainage areas less than one square mile.
C and X (unshaded)
Area of minimal flood hazard usually depicted on FIRMs as above the 500-year flood level
High-Risk Areas
In communities that participate in the NFIP, mandatory flood insurance purchase requirements apply to all of these zones:
ZONE DESCRIPTION
A
Areas with a 1% annual chance of flooding and a 26% chance of flooding over the life of a 30-year mortgage. Because detailed analyses are not performed for such areas, no depths or BFEs are shown within these zones.
AE
The base floodplain where BFEs are provided. AE zones are now used on new format FIRMs instead of A1–A30 zones.
A1–30
These are known as numbered A zones (e.g., A7 or A14). This is the base floodplain where the FIRM shows a BFE (old format).
AH
Areas with a 1% annual chance of shallow flooding, usually in the form of a pond, with an average depth ranging from 1 to 3 feet. These areas have a 26% chance of flooding over the life of a 30-year mortgage. BFEs derived from detailed analyses are shown at selected intervals within these zones.
AO
River or stream flood hazard areas and areas with a 1% or greater chance of shallow flooding each year, usually in the form of sheet flow, with an average depth ranging from 1 to 3 feet. These areas have a 26% chance of flooding over the life of a 30-year mortgage. Average flood depths derived from detailed analyses are shown within these zones.
AR
Areas with a temporarily increased flood risk due to the building or restoration of a flood control system (such as a levee or a dam). Mandatory flood insurance purchase requirements will apply, but rates will not exceed the rates for unnumbered A zones if the structure is built or restored in compliance with Zone AR floodplain management regulations.
A99
Areas with a 1% annual chance of flooding will be protected by a federal flood control system where construction has reached specified legal requirements. No depths or BFEs are shown within these zones.
High Risk: Coastal Areas
In communities that participate in the NFIP, mandatory flood insurance purchase requirements apply to all of these zones:
ZONE DESCRIPTION
V
Coastal areas with a 1% or greater chance of flooding and an additional hazard associated with storm waves. These areas have a 26% chance of flooding over the life of a 30-year mortgage. No BFEs are shown within these zones.
VE, V1–30
Coastal areas with a 1% or greater chance of flooding and an additional hazard associated with storm waves. These areas have a 26% chance of flooding over the life of a 30-year mortgage. BFEs derived from detailed analyses are shown at selected intervals within these zones.
Undetermined Risk Areas
ZONE DESCRIPTION
D
Areas with possible but undetermined flood hazards. No flood hazard analysis has been conducted. Flood insurance rates are commensurate with the uncertainty of the flood risk.
Building Property Eligibility
Flood insurance may be written only on a structure with two or more outside rigid walls and a fully secured roof affixed to a permanent site. Structures must resist flotation, collapse, and sideways motion. Usually, at least 51 percent of the actual cash value (ACV) of the property, including machinery and equipment that are a part of the building, must be above ground level.
Manufactured Homes
Manufactured or mobile homes, along with travel trailers, may be eligible, but they have separate eligibility standards. A manufactured or mobile home is defined as a structure built on a permanent chassis, transported to its site in one or more sections, and affixed to a permanent foundation.
A travel trailer without wheels is also eligible if it is built on a chassis and affixed to a permanent foundation, provided it is regulated under the community’s floodplain management and building ordinances or laws.
Two different eligibility rules that apply to manufactured homes are based on how long the flood policy has been in force.
For manufactured homes insured under policies that were effective on or after October 1, 1982, the home must be affixed to a permanent foundation. It must also be anchored if located in an SFHA.
For manufactured homes on a foundation that have been continuously insured since September 30, 1982, the requirements are not as rigorous.
Other Structures
Numerous other structures are considered eligible buildings, including the following.
Appurtenant structures
Silos and grain storage buildings
Cisterns
Buildings entirely over water that were constructed or substantially improved before October 1, 1982
Buildings partially over water, under certain circumstances
Boathouses located partially over water, under certain circumstances
Buildings in the course of construction that have yet to be walled and roofed except when construction has been stopped or delayed for more than 90 days and/or if the lowest floor used for rating purposes is below the BFE
Severe repetitive loss properties
Ineligible Buildings
The following buildings are among those typically ineligible for flood insurance coverage.
Buildings that are constructed or altered in a way that places them in violation of state or local floodplain management laws or regulations. Contents and personal property located in these buildings are also ineligible.
Container-type structures, such as gas and liquid tanks, chemical or reactor container tanks and brick kilns, including their contents
Buildings entirely over water if they were newly constructed or substantially improved on or after October 1, 1982
Buildings partially underground, if 50 percent or more of the structure’s ACV, including the machinery and equipment that are part of the building, is below ground level
Boat repair docks
Greenhouses (unless the structure has at least two rigid walls and a roof)
Contents Eligibility
To be eligible for coverage, contents must be located in a fully enclosed building or secured to prevent flotation out of the building. Additional categories of the eligible property include the following.
Vehicles and equipment—self-propelled vehicles or machines are eligible, provided they are not licensed for use on public roads and are (a) used primarily to service the described location or (b) designed and used to assist handicapped persons. Coverage applies only while the vehicles or machines are inside a building at the described location.
Contents located inside silos, grain storage buildings, and cisterns
NFIP Flood Insurance Coverage
Flood insurance is mandatory for most owners of mortgaged property located in an SFHA. This is because lenders that are federally regulated, supervised, or insured by federal agencies are not legally permitted to lend money on property in a flood plain zone when the community is participating in the NFIP unless the property is covered by flood insurance. The amount of flood insurance required in this situation must be at least equal to the smallest of these three amounts:
The outstanding principal balance of the loan
The insurable value of the structure (not including land). (Under the dwelling form and the RCBAP, the insurable value is based on the building’s replacement cost; the general property form provides actual cash coverage on the building, so the building’s insurable value is its ACV.)
The maximum amount of insurance available from the NFIP. (Property is often worth more than the maximum amount of flood insurance offered by the NFIP.)
This legal requirement has been poorly enforced in the past, partly because mortgages are often sold from one bank to another, and the penalty for noncompliance has been only $350. Biggert-Waters encourages lenders to comply with flood insurance requirements by increasing the penalty to $2,000 per violation with no limit on annual penalties.
Biggert-Waters permits the use of private insurance to satisfy the mandatory purchase requirement. “Private flood insurance” does not refer to NFIP policies that private insurers issue under the WYO Program, but rather to insurance underwritten by a private insurance company using a different policy form.
Lenders may purchase flood insurance on behalf of homeowners who fail to buy it themselves and then bill the homeowners for coverage. This is referred to as force-placed insurance. Within 30 days after receiving confirmation that a property owner has purchased his or her own flood insurance, Biggert-Waters requires mortgage lenders and servicers to terminate the force-placed insurance and refund any premiums or fees paid for any period of duplicate coverage.
At a real estate settlement, home buyers must now be made aware that flood insurance is available under the NFIP or from a private insurer, and they must also be notified if the property they are buying is located in an SFHA.
Homeowners with homes in moderate- to low-risk flood zones may not be compelled to purchase flood insurance. But residential and commercial properties not subject to such obvious risks of flood damage can and do suffer flood losses. There is a tendency of those whose property is not subject to an obvious flood hazard (such as a nearby river that floods reliably every spring or hurricane-related flooding in seaside communities) to discount the possibility of flood damage.
Another reason why relatively few property owners purchase flood insurance is that many insurance agents find it difficult to arrange NFIP policies. The application and rating procedures for NFIP flood insurance are entirely separate from those used in arranging other coverages, and the program has some requirements that are burdensome for agents. Nevertheless, the NFIP is often the only available source of flood insurance, particularly for homeowners and commercial property owners with obvious flood exposure.
Aimdar Advisory Group Inc represents the majority of Flood Insurance Carriers, feel free to reach us for flood insurance quotes.
