For those of you living in coastal regions, you are probably aware that Hurricane Season is upon you and flooding events are a real possibility. But even though flooding because of major weather events, like hurricanes, get more news coverage, flooding can occur in any region of the United States.
Floods alone have caused over $155 billion (yes, billion with a “B”) in property damages in the last decade and they continue to account for the majority of federally declared disasters. That high cost is why flood insurance has become an integral part of the real estate biz: lenders and homeowners want to make sure their asset is protected, and the federal government has an interest in minimizing the risk and the cost to all taxpayers. Here are some flood insurance tidbits that all real estate professionals should know.
WHAT IS THE DIFFERENCE BETWEEN PUBLIC AND PRIVATE FLOOD INSURANCE?
Private insurers can issue flood insurance, but when they deem certain locations as being high-risk, and thus unprofitable, they will decline to issue flood insurance for that location all together. That’s where the Federal Emergency Management Agency (FEMA) comes in to pick up the slack.
FEMA offers a public option at uniform rates through a program called the National Flood Insurance Program (NFIP). The NFIP works through private insurance companies to provide flood insurance to property owners, renters, and businesses located in “participating communities.” There are approximately 23,000 “participating communities” in the United States that have gained that status by submitting an application to FEMA along with a FEMA-approved floodplain management plan. Just think about it…the federal government wants to incentivize communities to take ownership of their own flood mitigation and in return, residents are reassured that some level of flood insurance is available for them. Win-Win.
WHEN IS FLOOD INSURANCE REQUIRED?
- Special Flood Hazard Areas – Properties that are mortgaged by federally backed lenders and that FEMA has deemed high risk for flooding are required to carry flood insurance. These properties are determined to be in a “Special Flood Hazard Area”. Individuals in a Special Flood Hazard Area can seek to have the flood insurance requirement dropped if they can show their structure or parcel of land is either naturally elevated or has been elevated by earthen fill so that the property would not be inundated by the base flood.
- Making a deal with the Feds – If a property flooded which was not insured or was underinsured, the federal government has handed out loans or grants with the condition that the property owner carries flood insurance on the property forevermore or until FEMA says so. This obligation runs with the land and is passed on to any future owners. In flood-prone regions of the country, title examiners often come across these agreements in the public records and must list it as an exception to the title insurance policy and/or notify the buyer of this requirement.
*According to testimony provided on February 27, 2020 by Michael Grimm, the Assistant Administrator for Risk Management for the Federal Insurance and Mitigation Administration(FIMA).
- Optional for Participating Communities – If the subject property is in a Participating Community but is not in a Special Flood Hazard Area, NFIP flood insurance is available and optional.
WHAT DOES FLOOD INSURANCE COVER?
- Flood insurance covers direct physical losses caused by a flood, defined as an excess of water on land that is normally dry and affecting two or more acres of land or two or more properties, according to the NFIP. If a property sustains water damage, the source of the water is key to whether it would be a Flood Insurance or a Homeowner’s Insurance claim. For example, if a pipe hidden in the wall of a home busts open and floods the home, the Homeowner’s Insurance Policy would be implicated. The NFIP gives some examples of flooding covered by a flood policy as storm surge overflow, runoff from heavy rainfall, melting snow, or even water backup as a direct result of flooding. Specifically excepted from coverage is moisture, mold, or mildew that could have been prevented by the property owner.
BEWARE OF PITFALLS
- Building coverage is separate from contents coverage. Flood insurance offered by the NFIP can cover a residential building up to $250,000 in damage and up to $100,000 for contents. Commercial properties have higher maximum coverages at $500,000 for building and $500,000 for contents. The building policy and the contents policy are often treated separately and always have separate deductibles. A buyer MUST make clear they want to purchase contents coverage in addition to the building coverage. Many victims of Hurricane Katrina learned this lesson the hard way, resulting in a slew of litigation and prompting changes to the wording and clarity in the policy language.
- There is a waiting period of 30 days for optional NFIP policies (with exceptions, of course). Unless the individual is purchasing an NFIP flood policy as a lender requirement or the property was recently redesignated as a Special Flood Hazard Area, the insured can expect a 30-day waiting period from the purchase date for the coverage to take effect. If an individual purchases an NFIP policy on July 2nd, and a Super Storm comes through the town on July 30th causing the property to flood, the NFIP flood insurance policy will do them no good, sadly. Private flood policies usually have shorter waiting periods of around 14 days. PRACTICE TIP: All real estate professionals should be aware that another way to avoid a lapse in existing flood coverage is for the seller to transfer/assign their flood policy to the new buyer at or before a closing.