CHAPTER ONE - WHY FLOOD INSURANCE?
(NOTE: The use of the male gender, i.e. “he,” “his,” “him” etc., is used to designate a person of either sex for simplicity purposes, as having to refer to “he/she,” “him/her,” is rather clumsy. )
(Also Note: "Insurer," or "insurance company" as used in this discussion, refers to the insurance company that may be writing flood insurance under the National Flood Insurance Program's "Write Your Own" program, and backed by the federal government and managed by FEMA, a component of the department of Homeland Security.)
Also, it should be pointed out that the primary–and in many cases, the only–source of data and statistics, regulations and details are from the National Flood Insurance Program (NFIP). Most of the information in this text is from the NFIP's training programs and in many cases, the exact wording is used because as in most heavily regulated programs, precise wording is necessary. Technical details are available in the Flood Insurance Manual, available to the flood insurance agent from FEMA, either in rate-book form or from the internet addresses:
www.fema.gov/nfip; www.floodsmart.gov; and http://training.nfipstat.com &www.fema.gov/business/nfip
HISTORY
Some historians maintain that flood insurance had its inception about 200 years ago when an "extensive house room" was listed for rent in Capt May, New Jersey, which started the beach-front getaway concept. Interestingly, this was a good case of advertising-gone-wild as the "extensive" accommodations was nothing more than a single-occupancy room with a curtain down the middle that separated the men from the women. From this modest beach-going "resort" to today's private, gated compounds with full security and multi-million dollar price tags, the coastline has gone from uninterrupted beached with occasional resorts, to fish shacks-replaced by cottages, replaced by homes, replaced by second homes, replaced by very expensive condominiums.
After WWII, public works commenced which included road-building and bridge-raising, and after WWII, more than a million new residents move to the coast every year. Many of the homes were moved occasionally as beaches eroded due to normal wave action. Today, any regulations requiring houses to be constructed outside of such an erosion area faces the threat of lawsuit—even though it is acknowledged privately (and sometimes publicly) that this is pure lunacy and an improper response to the forces of wind, tides and waves.
What happened? Storms happened, as did erosion, flooding, over-washing—such as what happened in 1962 when a storm and high tide collided and flushed 50 houses and a 10-mile paved road into the bay (Congress then belatedly placed the island permanently off-limits to developers).
Congress should have acted because of the huge amounts of transportation grants that enticed millions of people to the shore in the form of federal disaster aid which helped pay the damages to their homes when storms hit. During the 1990's in particular, $9 billion of disaster aid was sent to the coastal areas, along with billions more of taxpayer subsidized loans, flood payments and other assistance.
Congress is not only the chief payors and post-storm garbage collectors, but also are the nation's insurance underwriters. This is not the proper forum to argue whether the government should be in the flood insurance business, but a parallel can be drawn with the governments entry into health insurance via Medicare. The private insurance industry was asked and given every opportunity to cover the elderly population with medical insurance, but they were unable to do so financially, so the government had to step in. The same is true of flood insurance—private industry was asked to provide flood insurance but was not able to do so. So, Congress recognized a palpably bad situation and acted decisively to make it better. So, the National Flood Insurance Program was developed.
The idea of National Flood Insurance was simple (good ideas usually are): communities that are prone to flooding would get flood insurance provided they guided new development out of the floodplain. They reasoned that old buildings would eventually disappear and new buildings would be constructed at a safe distance from the water's edge. Therefore, it was reasoned, tax dollars would be saved as disaster relief would rapidly diminish because there would not be the exposure to flooding any longer—besides, it would help preserve human life as people would not be living so near to the flood risk. Also, it would provide a haven for all kinds of wildlife that would be protected from flooding and storms.
Unfortunately, the coastal population is growing by about 4,000 people per day. Also, sea levels are rising, and the country has just recently been hit with devastating hurricanes. Federal agencies are trying to combat the problems by building seawalls to stop erosion and dumping billions of dollars in sand onto the beaches. FEMA and the National Flood Insurance Program struggle to keep up. Also, unfortunately, the House of Representative in 1991 passed legislation that would have made sweeping reforms to the National Flood Insurance Program, but it died in the Senate. Regardless, Congress has not sat on its hands entirely, as there have been recent changes–welcome and overdue.
FLOOD INSURANCE OR HOMEOWNERS INSURANCE
The hurricane damages over the past three years, plus continued tornado and flooding damages elsewhere in the country, have not been protected by the National Flood Insurance Program (NFIP) as they should, often because homeowners were under the mistaken idea that their Homeowners Insurance would cover any damage to their property. Throughout the years, the insurance industry and the National Association of Insurance Commissioners (NAIC) have worked hard to make insurance policies more understandable to policyholders without interfering with legal definitions of insurance terminology, and they have been quite successful. However, very few insurance policyholders (of most any type of insurance) have ever read their policy and many agents are loathe to go into detail as to coverage as they may be afraid that they may be misquoted later if a claim is not paid (or, possibly, they feel that they would have "resell" every policy). However, a good agent will be familiar with flood hazards in the geographical areas in which he works, and with the ability to market flood insurance, he can provide professional coverage.
Water damage is referred to in several places in the standard Homeowner's policies, which are quite explicit. The following is standard Insurance Service Office Homeowner's wording.
ACCIDENTAL WATER DAMAGE
Accidental water damage is referred to under Coverage C-Personal Property:
"We insure for direct physical loss to the property described in Coverage C caused by a peril listed below unless the loss is excluded in Section I-Exclusions.. . .
12. Accidental discharge or overflow of water or steam, from within a plumbing, heating, air conditioning or automatic fire protective sprinkler system or from within a household appliance. In this peril, a plumbing system does not include a sump, sump pump or related equipment. " This defines what the HO policy DOES cover.
CONTINOUS OR REPEATED SEEPAGE OR LEAKAGE OF WATER OR STEAM
Under COVERAGE B-Other Structures: "We insure against risks of direct loss to property described in Coverages A and B only if that loss is a physical loss to property; however, we do not insure loss: ...2. … caused by: ...e. …constant or repeated seepage or leakage of water or steam over a period of weeks, months or years from within a plumbing, heating, air conditioning or automatic fire protective sprinkler system or from within a household appliance;"
This plainly spells out that seepage and leakage of water are covered under the HO policy.
ACCIDENTAL DISCHARGE OF WATER OR STEAM CAUSED OFF-PREMISES
"COVERAGE C-Personal Property: "We insure for direct physical loss to the property described in Coverage C caused by a peril listed below unless the loss is excluded in Section I-Exclusions.. "12. Accidental Discharge or Overflow of Water or Steam,... This peril does not include loss: ...c. … on the residence premises caused by accidental discharge or overflow which occurs off the residence premises;" This excludes discharge or overflow of water onto the property.
In addition, Courts have ruled:
(Overflowing from neighboring land): "This provision excludes any loss (direct, physical) from water coming from off the property because of accidental discharge or overflow. If a neighbor puts a retention pond in his back yard, and due to sudden Spring rains, it overflows onto your property, your Homeowners insurance will not cover the damage."
WATER DAMAGE
Under the HO policy Exclusions, "We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss...."c. …Water Damage, meaning:
Water diverted from neighboring property: When water was diverted into the insured’s property because of berms and dams built by a neighbor, the Homeowners policy excludes damage to the insured’s property."
Also excluded is Erosion from nearby lake (also discussed earlier): "If damage to an insured’s residence is caused by rising water from a nearby lake eroding the base of the cliff upon which the residence stands, and the erosion caused collapse of stairs and patio and separation of foundation wall, loss would be excluded under earth movement and water damage exclusions."
SURFACE WATER
Direct loss by fire, explosion or theft resulting from water damage is covered.
Also, "We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss....c. …Water Damage, meaning: ...(3) water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.
Obviously, there is no Homeowner's Insurance protection from flood damage.
Before delving into the National Flood Insurance Program and the flood insurance policies themselves, there is one facet of flood insurance that should be mentioned at this time because of its importance and the publicity surrounding Katrina's experience which illustrated graphically the importance of insuring not only the homes, but also the contents. The following is consolidated from several news reports on this problem.
ADDING COVERAGE OF CONTENTS ON FLOOD POLICY
After Hurricane Katrina, in particular, it was apparent that not only did many people not have flood insurance, those that did may not have had their contents covered. The sad facts are that about 20% of those who live in a flood prone area purchase flood insurance, and those that do, often do not purchase the correct amount. It has been estimated that although 98% of homeowners have insurance, nearly 2/3 of the homes in this country are underinsured by an average of 27% (stated by Insurance Information Institute). But those who live or had lived, on the Gulf Coast prior to Katrina, have not renewed their flood insurance, if they had coverage to start with, because they do not have anything to insure anymore. There does seem to be an increase in policy sales, but statistics are not reliable in that area.
Of those coastal residents that did have flood insurance, many were not adequately insured, and many neglected to include coverage for contents. Why would someone buy an inadequate amount of insurance, particularly considering the cost to be entirely reasonable? Basically, many felt that they would not lose the entire house. Some of those that did not purchase an adequate amount, now firmly believe that they must with their professional insurance agent to make sure they have sufficient coverage.
How could contents not be covered? One reason, often quoted on the Gulf Coast after the storm, is that mortgage companies required flood insurance but did not require contents coverage, so contents coverage sort of "fell through the cracks."
Many homes on the Mississippi coast, for instance, are appraised at more than $250,000, the maximum allowed under the NFIP, along with a contents maximum of $100,000. Excess coverage can be purchased through some private insurers.
Now, many are delaying purchasing flood insurance until the beginning of the hurricane season as they can save a few dollars, and since many of them are in a financial bind because of no flood insurance on property they have lost, or inadequate coverage, every penny counts. This showed up in last year's (2006) flood insurance sales, showing a surge around the first of May.
Another item that is important anywhere there is a flood problem—when people live in a house for several years, the value of the house increases (as does the cost to rebuild) and the homeowners just continue to pay their premiums when due without taking a proactive role in making sure that they have full coverage in case of a flood.
WHAT IS A FLOOD?
For purposes of this text, the only acceptable definition of "flood" is that provided by the NFIP:
A 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 (at least one of which is your property) from:
- Overflow of inland or tidal waters;
- Unusual and rapid accumulation or runoff of surface waters from any source;
- Mudflow (defined as "A river of liquid and flowing mud on the surfaces of normally dry land areas, as when earth is carried by a current of water…"); or
- Collapse of subsidence of land along the shore of a lake or 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."
F As a general rule, physical damage to a building or personal property
"directly" caused by a flood is covered under the flood insurance policy.
As an example, damages caused by the backup of a sewer are covered by the flood policy if the backup is a direct result of flooding. If the water damage is caused by some other problem, then the damages are not covered. (For more detail as to what is specifically covered and what is not covered under the flood insurance policy, these will be covered in the policy discussion.)
IDIOSYNCRASIES OF A FLOOD POLICY
There are three facts in regards to a Standard Flood Insurance Policy that must be kept in mind and understood ("FEMA, NFIP Summary of Coverage"). To start, (1) it is a single-peril (flood) insurance policy that (2)pays for direct physical damage to the insured property (3)up to the replacement cost or the Actual Cash Value (ACV) of the actual damages or the policy limit of liability, whichever is less.
Contents Coverage
Simply put, contents coverage must be purchased separately, i.e. it is NOT automatically included in the policy.
Not a Valued Policy
Flood Insurance policies are not "valued policies." A valued policy pays the limit of liability in the event of a total loss. As an example, if the insured home is totally destroyed by a fire and it will cost $150,000 to rebuild the house, and your homeowner's insurance (a valued policy) has a limit of $200,000 of liability on the house, the homeowner would receive $200,000. On the other hand, flood insurance pays only the replacement cost or the Actual Cash Value, up to the policy limit.
Not a Guaranteed Replacement Cost Policy
A guaranteed replacement cost policy pays the cost to rebuild the home regardless of the limit of liability. As an example, if the home is totally destroyed by fire and it costs $200,000 to rebuild, and if the homeowner's policy is guaranteed replacement cost policy with a $150,000 limit on the building, the policyholder would receive $200,000. Flood insurance will not pay more than the policy limit.
DEDUCTIBLES
Most people are familiar with deductibles as they have had to choose a deductible for their automobile, health and/or homeowner's insurance. And, as with all of these insurance forms, a higher deductible will lower the premium, but, conversely, it will also reduce the claim payment.
Different deductibles for building property and personal property coverage are allowed, and the deductibles will, therefore, be applied separately. A mortgage company may require that the deductible is no more than a prescribed amount.
AREAS BELOW LOWEST ELEVATED FLOOR & BASEMENTS
There are certain limitations on flood insurance coverage, as described in the policy, but this is a good time to be introduced to areas of a house that are insurable (or not). These will be discussed in detail later in the text, but the four basic coverage limitations in respect to areas that are below the lowest elevated floor and basements are briefly discussed, as follows:
Basements
There are coverage limitations that apply to "basements" which are defined as any area of the building, including a sunken room or sunken portion of a room, having its floor below ground level on all sides.
Crawlspace
"Crawlspace" is the area beneath a building when the building rests on foundation walls, and the coverage limitations will apply to this "crawlspace" below the floor.
Elevated Building on Full Story Foundation Walls
Certain coverage limitations will apply to the enclosed (lowest floor) area of the building, even when the building is constructed with a "walkout" or "daylight" basement.
Elevated Building with Enclosure
Certain coverage limitations will apply to "enclosed areas" at ground level under an elevated building. An elevated building allows water to flow freely under the living quarters, thereby putting less strain on the building in case of flooding. An "enclosure" is the area that is below the lowest elevated floor and which is fully enclosed by rigid walls.
VALUING FLOOD DAMAGES
There are two methods of valuing flood damages: Replacement Cost Value (RCV), or Actual Cash Value (ACV).
Replacement Cost Value
RCV is the cost to replace that part of the building that is damaged by flood, and is calculated without depreciations. Three conditions must be met for RCV:
- The building must be a single-family dwelling, and
- The building must be the principal residence, defined as the insured must live there at least 80% of the year, and
- The building coverage is at least 80% of the full replacement cost of the building, or is the maximum available through the flood insurance policy for that property.
Actual Cash Value
ACV is the RCV minus the value of the depreciation of the property. Some building items, carpeting for instance, are always adjusted on an ACV basis—wall-to-wall carpeting could lose between 10-14 percent of its value each year, depending upon carpet quality. This depreciation will be considered in the adjustment.
Personal property is always valued at ACV.
MULTIPLE CLAIMS
One rather-unusual provision of the flood insurance (discussed in detail later) is that property owners of "severe repetitive loss properties" (as defined in the policy) may be eligible for an FEMA mitigation grant for property improvements that reduce the likelihood of future flood damages. If the property owner refuses the grant money,(can't imagine why they would..) they could be required to pay increased flood insurance premiums.
A "severe repetitive loss property" is when the property is either where four or more separate flood claim payments have been made and each claim payment is more than $5,000; or there have been at least two flood claims and the cumulative payments are more than the value of the property.
INCREASED COST OF COMPLIANCE COVERAGE
Another rather unique feature of most of the NFIP policies is that they include Increased Cost of Compliance (ICC) coverage that goes into effect when flood damages are severe. The ICC coverage provides up to $30,000 of the cost to elevate, demolish, or relocate the home. If the community declares that the home is "substantially damaged" or "repetitively damaged" by a flood, it will require the property owner to bring the property up to current community standards.
The total amount of the building claim and the ICC claim cannot be more than the maximum limit for building property coverage ($250,000 for a single-family home). An ICC claim does not affect a personal property claim (up to $100,000), as the personal property claim is paid separately.
NOTE: The above description of coverages under the NFIP is only summaries and details of the coverages will be discussed in detail later in this text.
1. The Flood Policy says the policy covers loss to property as a result of
A. direct physical loss.
B. inadvertent overflow of domestic water.
C. catastrophic.
D. hurricane wind driven water.
2. "If damage to an insured’s residence is caused by rising water from a nearby lake eroding the base of the cliff upon which the residence stands, and the erosion caused collapse of stairs and patio and separation of foundation wall, loss would be excluded …" is
A. an exclusion in the NFIP flood program policy.
B. referring to Homeowner's insurance policy.
C. a Federal ruling in a court case.
D. standard wording in a Dwelling Fire and Flood Insurance policy.
3. After Hurricane Katrina, in particular, it was apparent that not only did many people not have flood insurance,
A. the insurance was worthless.
B. they carried too much insurance.
C. they needed fire insurance more than flood insurance.
D. those that did may not have had their contents covered
4. A flood insurance policy pays for direct physical damage to the insured property up to the replacement cost of the Actual Cash Value (ACV) of the actual damages or the policy limit of liability, whichever is less and is
A. usually sold as an umbrella policy.
B. a single-peril (flood insurance) insurance policy.
C. a multiple-peril policy
D. only sold by government employees.
5. Any area of the building and including a sunken room or sunken portion of a room, having its floor below ground level on all sides for flood insurance purposes, is
A. a basement.
B. an easement.
C. uninsurable.
D. considered as the first floor of the building.
6. There are two methods of valuing flood damages:
A. estimated and documented.
B. Replacement Cost Value (RCV), or Actual Cash Value (ACV).
C. Federal evaluation and Community evaluation.
D. Pre-FIRM and Post-FIRM.
7. When the property is either where four or more separate flood claim payments have been made and each claim payment is more than $5,000; or there have been at least two flood claims and the cumulative payments are more than the value of the property is called
A. uninsurable property.
B. a severe repetitive loss property
C. floodplain mismanagement.
D. Class SFC property.
8. The coverage provision that provides up to $30,000 of the cost to elevate, demolish, or relocate the home is the
A. Increased Cost of Compliance provision.
B. demolition and destruction provision.
C. post-disaster assessment.
D. the Post-FIRM rating provision.
9. If the community declares that the home is "substantially damaged" or "repetitively damaged" by a flood,
A. the property owner must pay for destruction or moving of his property out of his own pocket.
B. the cost of relocation or destruction of the property is always borne by the community.
C. it will require the property owner to bring the property up to current community standards
D. the property owner is entitled to full compensation from FEMA.
10. The total amount of the building claim and the ICC claim
A. can never exceed $50,000.
B. are separate claims so the maximum limit is $500,000.
C. cannot be more than the maximum limit for building property coverage ($250,000 for a single-family home).
D. is unlimited if the insured carries an excess damage coverage.