Flood Insurance: Definition, How It Works, Coverage, Example

What Is Flood Insurance?

Flood insurance is a type of property insurance that covers a dwelling for losses sustained by water damage, specifically due to flooding. Floods may be caused by heavy or prolonged rain, melting snow, coastal storm surges, blocked storm drainage systems, or levee dam failure.

In many places, a flood is considered a vis major event, and the damage and destruction it causes are uncovered if you do not get supplemental insurance.

How Flood Insurance Works

A type of catastrophe insurance, a flood insurance policy is different from the basic hazard insurance coverage contained in a homeowners insurance policy. Flood insurance policies are available for all homes and commercial properties.

Standard homeowners insurance covers interior water damage caused by factors like storms or burst pipes. However, it generally doesn't cover destruction or damage caused by floodwaters. Property owners who live in an area prone to floods usually need to get special insurance.

Flood insurance works like other insurance products. The insured (the property owner) pays an annual premium based on the property's flood risk and the deductible they choose. Your deductible is the portion of the claim that you must pay out of pocket. A policy with a higher deductible will likely have a lower monthly premium, and the opposite is also true.

If the property or its contents are damaged or destroyed by flooding caused by an external event like rain, snow, storms, or collapsed or failed infrastructure, the homeowner is covered. They receive cash up to the policy limit for the amount of money required to repair the damage or rebuild the structure.

Unlike a standard homeowners policy, flood insurance requires that a policyholder buy separate policies to cover a dwelling and its contents. A separate coverage rider is needed to cover sewer backup if the backup was not caused by the rising floodwaters.

The National Flood Insurance Program

The National Flood Insurance Program (NFIP), managed by the Federal Emergency Management Agency (FEMA), offers flood insurance to homeowners in participating communities and those in NFIP-designated floodplains. The actual insurance policies are issued by private insurance companies, not by the NFIP or FEMA.

The Federal Emergency Management Agency updates maps of the flood zones in the U.S., the areas that are most likely to experience flooding. The agency updates the zones as they change along with new and intensifying weather patterns. The zones are broken up into subsections for rating purposes. Properties that are located in zones B, C, and X run a moderate to low risk for flooding. Low risk means less than a 1% chance of annual flooding.

Properties located in zones designated with an A are considered high risk. They are broken down further, with descriptions of potential flood-water heights and estimated rates of occurrence over the course of a 30-year mortgage. Properties that receive a V designation are similar to those located in zone A. These are high-risk areas that are positioned along the coast.

Some homeowners may be in Zone D, which indicates that a determination has yet to be made for the area. Flood zone maps are continuously reviewed to accommodate changing weather patterns and artificial changes to the environment, such as dams and levees.

You can find your flood zone by visiting Floodsmart.gov and checking a property address at the flood map service center.

The Cost of Flood Insurance

The NFIP regulates the pricing of flood insurance policies, and the cost will not differ between issuers. If you live in a flood zone or an NFIP-participating community, the NFIP can help you find an insurance agent.

To determine your policy cost, your agent will look at factors like your home's location and structure, including its proximity to a body of water and elevation.

Types of Coverage

Costs will also be affected by the type of coverage you have selected, such as actual cash value (ACV) and replacement cost value (RCV).

Actual cash value coverage will pay you the current value of the item or property at the time the damage occurred. In other words, it doesn't pay for a new item but instead considers depreciation or the reduction in value due to age or wear and tear. In other words, the insurer would pay you the depreciated cash value.

Replacement cost coverage pays to replace the covered damage at today's dollar value, allowing you to replace the covered damage with new items or materials. After you file a claim, the insurer may initially pay you the actual cash value. Once the repairs have been completed, the insurer will pay you what it costs to replace the damaged items. In other words, you'll receive two installments: the ACV followed by the difference in depreciated cash value between the ACV and RCV.

Special Considerations

Factors such as the flood zone designation, age of the property, elevation, and the number of floors can all impact pricing. A Preferred Risk Policy (a lower-cost flood insurance policy) provides both building and contents coverage for properties in moderate- to low-risk areas for one price. Certain communities that have implemented flooding safeguards also qualify for discounts under the NFIP. As a result, annual premiums can vary widely.

Policy Coverage Amount

With NFIP policies, the maximum for residential structures is $250,000 in building coverage and $100,000 in contents coverage. The maximum for businesses is $500,000 in building coverage and $500,000 in contents coverage.

Of course, you can always seek out coverage on your own, especially if you want to insure your property for a larger amount (rates for additional coverage won't be regulated, however). Starting with the company issuing your regular homeowners policy is often a good idea.

Frequently Asked Questions (FAQs)

The Bottom Line

Whether or not flood insurance is a good idea for you will depend on several factors, mainly whether your property is in an area that is at high risk of flooding. However, floods can occur anywhere. You don't need to live near water for your home to be flooded, such as because of storms, melting snow, or backed-up drainage systems. Remember that if you want to protect yourself from flood damage costs, you'll need to buy a policy in addition to your homeowners insurance.