What is Flood Insurance?

According to the National Flood Insurance Program (NFIP), floods are the most common natural disaster in the United States, causing almost $20 billion of damage to personal and real property since 1999. The NFIP estimates that the average flood insurance claim paid is almost $50,000.

In 1968, Congress created the NFIP to provide an avenue for property owners to protect themselves against flood disasters. The NFIP and many insurance companies offer insurance to homeowners, renters, and business owners if their community participates in the NFIP.

Over 20,000 communities participate in the NFIP. These communities agree to adopt and enforce local ordinances that either meet or exceed the requirements of the Federal Emergency Management Agency (FEMA)-the government agency that oversees the NFIP-to reduce the risk of flooding.

Because significant losses could occur during a flood, property owners, and even those who rent property, should consider purchasing insurance to protect their real and personal property. For those in high-risk flood areas, also known as Special Flood Hazard Areas, this type of insurance is mandatory in order to secure financing for property. For those who own or rent, a home or business that is not in a high-risk area, insurance has become an affordable and much-needed form of protection against losses from a flood disaster.

Generally, there are four types of insurance that cover floods: residential; commercial; renters; and preferred risk policy.

Residential

Usually, flood damage is not covered under a typical homeowner's insurance policy. Residential insurance is available from many insurance companies and is guaranteed by the NFIP.

The NFIP defines a flood, for residential insurance purposes, as a temporary overflow of inland or tidal waters onto normally dry land, or run-off water from rain, melting snow, and other natural causes. Floods also include mudflows onto dry land, as well as water-erosion or collapse of land that is next to a lake, pond, river, or stream, resulting in the temporary overflow of water on normally dry land.

Residential flood insurance allows for coverage of up to $250,000 for the structure and up to $100,000 for contents, or personal property, in the structure.

Commercial

Flood damage is usually not covered under a typical general business insurance policy. Commercial insurance is available from many insurance companies and is guaranteed by the NFIP.

The NFIP defines a flood, for commercial insurance purposes, as a temporary overflow of inland or tidal waters onto normally dry land, or run-off water from rain, melting snow, and other natural causes. Floods also include mudflows onto dry land, as well as water-erosion or collapse of land that is next to a lake, pond, river, or stream, resulting in the temporary overflow of water on normally dry land.

This type of insurance allows for coverage of up to $500,000 for the structure and up to $500,000 for the contents of the structure.

Renters

Flood damage is usually not covered under a typical renter's insurance policy. This type of insurance for renters is available from many insurance companies and is guaranteed by the NFIP.

The NFIP defines a flood as a temporary overflow of inland or tidal waters onto normally dry land, or run-off water from rain, melting snow, and other natural causes. Floods also include mudflows onto dry land, as well as water-erosion or collapse of land that is next to a lake, pond, river, or stream, resulting in the temporary overflow of water on normally dry land.

Renters insurance covering floods allows for coverage of up to $100,000 for contents, or personal property, in the structure that was damaged by flooding.

Preferred Risk Policy

A preferred risk policy is designed for home, or business, owners with property in low-to-moderate flood hazard areas who want insurance coverage against floods. Preferred risk policies are cost-effective alternatives to standard residential and commercial flood policies. Preferred risk policies were extended to home and business owners as a result of changes by FEMA to its internal classification of flood areas.

A preferred risk policy offers two types of coverage: building and contents coverage; and contents coverage only.

For homeowners, a preferred risk policy covers up to $250,000 for the structure and up to $100,000 for contents, or personal property, in the structure. For a business, the limits are $500,000 for the structure and $500,000 for contents.

Understanding the different types of insurance that cover floods is important in determining the amount and kind of coverage that home and business owners need to protect their structure, and its contents, against losses caused by flooding.

Quotes

When evaluating insurance quotes for flood coverage, there are several factors that should be considered that affect the premiums that a potential purchaser would pay. These include the location of the residence, business, or rental, and the value of the real and personal property.

Generally, the risk of flooding in a particular, high-risk area translates into a higher premium for coverage, regardless of the structure or contents that are insured. In these areas, insurance premiums can be as much as $2,000 per year.

The value of the real and personal property that is insured affects the rates. A home or business owner who seeks the maximum amount of coverage, $250,000 and $500,000, respectively, for the structure, will pay more in premiums than an owner of property who seeks lower coverage amounts.

Considering a potential purchaser’s location, and the value of the real and personal property to be insured, is critical in determining insurance rates.

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