Your guide to understanding the pros and cons of both private flood insurance and National Flood Insurance Program (NFIP) coverage.
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With flood insurance, you’re covered from flood-induced damage to your home and personal belongings. Flood insurance is traditionally written and insured by the federal government’s National Flood Insurance Program (NFIP), which is managed by the Federal Emergency Management Agency (FEMA). However, private flood insurance has gradually nudged its way into the marketplace.
In addition to covering your home and personal belongings, many private flood insurers also offer coverage for your additional living expenses if flooding forces you to flee your home and relocate. Also referred to as loss-of-use coverage, the federal government doesn’t offer this protection in their policy.
But private flood insurance has one major disadvantage as well: your insurance company can choose not to renew your policy if it’s determined that you’re too risky to insure. Despite its flaws, the NFIP can’t cancel your coverage.
If you live in a high-risk flood zone, you traditionally get coverage through the National Flood Insurance Program, which provides reliable, cost-controlled coverage
Recent legislation now allows lenders in high-risk areas to accept private flood insurance, which often provides more comprehensive coverage than the NFIP
The NFIP underwrites the vast majority of flood insurance in the United States, insuring more than five million homes, according to the latest figures released by FEMA. The average NFIP flood policy costs around $700 annually.
Policies administered by the NFIP are sold in one of two ways, depending on where you live:
If you live in one of the NFIP’s participating communities, you buy directly through one of the program’s direct servicing agents.
If you don’t live in one of the NFIP’s participating communities, flood insurance is available through one of 59 Write Your Own (WYO) companies. (The WYO program simply allows private insurance companies to write and service NFIP flood insurance using their own name and branding.)
NFIP flood insurance has two components of coverage:
Building coverage, which is limited to $250,000
Contents coverage, which is limited to $100,000.
The NFIP allows you to buy one coverage or both, but your mortgage company may have their own specific requirements. If your lender does have a flood insurance requirement, they’ll probably stipulate that you need building protection at the very least.
Until recently, if you had a federally-backed mortgage and you lived in a high-risk flood zone, your mortgage company could require you to buy flood insurance exclusively through the NFIP. But as of July 1, 2019, lenders are required to accept private flood insurance if it satisfies certain criteria.
The law, called The Biggert-Waters Act, requires federal government regulating bodies to issue a rule to regulated lending institutions to accept private flood insurance if the coverage follows the criteria listed below:
That the policy provides sufficient protection for the home that the mortgage is secured against
That the lender documents their decision regarding the sufficiency of the private insurance policy in writing
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Private flood insurance only makes up around 5% of the flood insurance market, but the number of people turning to private flood insurance instead of the government program appears to be on the upswing. A recent National Association of Insurance Companies (NAIC) study found that flood insurance premiums were up 71% from 2016 to 2018, and 15 states experienced over 100% growth in premiums over that span.
There are a couple of broad reasons why private flood insurance is starting to flourish.
Insurance companies no longer view flood insurance as an untouchable risk. Company models for underwriting flood risk are more sophisticated, and the third-party firms in charge of creating flood risk models are getting better at predicting floods. This technological breakthrough has incentivized more investment in insurance companies, and as a result, companies are expanding and pouring more resources into new markets.
It’s important to note as well that the NFIP — and FEMA in particular — are over $20 billion in debt. The unpredictability of the government program has both insurance policymakers and policyholders searching for another answer.
You’ll typically find there are a few types of private flood insurance offerings:
A standalone policy with high coverage limits for your home and personal belongings
An excess flood policy which essentially provides you with additional insurance in the event that you’ve reached your NFIP coverage limits
A flood endorsement which has low coverage amounts and can be added to your homeowners insurance for a small additional premium
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Here are the top ten writers of private flood insurance by market share, according to the Insurance Information Institute.
The number of companies writing private flood insurance increased from 20 in 2016 to 33 as of 2017, according to the Insurance Information Institute.
|NFIP||Private flood insurance|
|Max rebuild limit||$250,000||Typically up to $500,000 or higher|
|Availability||All 50 states||May be limited in higher-risk areas|
|Elevation certificate required||Yes||No|
|Waiting period||30 days||15 days|
|Building coverage||Replacement cost||Replacement cost|
|Contents coverage||Actual cash value||Replacement cost|
|Loss avoidance coverage (sandbags, etc)||No||Yes|
The Biggert-Waters Act has effectively erased the barriers that previously existed for private flood insurance. And on the consumer end, there’s a greater variety of insurance options and a better opportunity to keep insurance costs down. But the privatization of flood insurance could also have some unintended consequences.
With the federal government plan, you know what you’re getting: $250,000 in rebuild coverage, $100,000 in contents coverage, a deductible of either $1,000 or $1,250, and a fairly reasonable premium (the national average hovers around $700). Furthermore, the NFIP can’t drop you from your policy like a private insurance company could if your home is deemed too risky to insure. (Although, in the event of a government shutdown, your NFIP policy could lapse).
The fear with private flood insurance — particularly in high-risk areas where insurance costs tend to be higher — is companies may try and capitalize on the high-cost market by offering low-cost, but high-deductible policies. The problem with high-deductible plans is you may not be able to afford to pay your deductible when it comes time to file a claim. If you can’t pay your deductible, your insurance won’t cover you.
But private flood insurance has its share of advantages as well. As artificial intelligence becomes more advanced and better at predicting flood risk at individual residences, homes will be underwritten and quoted more accurately, which could result in lower rates.
We’ve already gone over how private flood insurance offers higher coverage limits than the NFIP, but it also offers more comprehensive protection as well. With private flood insurance, you can get your personal property covered at its replacement cost, which replaces your belongings without deducting depreciation from the replacement value. The NFIP plan will only reimburse you for the depreciated amount, or actual cash value, of your flood-damaged items.
Another advantage of private flood insurance over the NFIP is the shortened waiting period. Your waiting period is the amount of time it takes for your policy to kick in after the purchase date. With private flood insurance, your waiting period is typically 15 days, compared to 30 days with the NFIP plan. If you’re two weeks out from hurricane season and you haven’t purchased flood insurance yet, the private option may be your best bet.
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