The National Flood Insurance Program (NFIP) was created by the US government in 1968. The goal of the plan was to help property owners better protect themselves against damages caused by flooding, which the standard homeowners insurance policy specifically excludes.
What Does Flood Insurance Cover?
Flood insurance coverage can be purchased by homeowners, condo owners, and renters and applies to both residential and commercial properties. The building section of the policy covers the building itself, the building’s foundation, utility systems like your electric or plumbing, your major appliances, permanently installed fixtures like cabinets or flooring, your detached garages, and the removal of debris after a flood.
The personal contents section of the policy covers your furniture, clothing, portable A/C units, throw rugs, washers and dryers, the food in your freezer, and limited valuables.
You have the option to purchase building coverage, personal contents coverage, or both depending on your living situation – owning or renting your home.
There are limitations to all of these coverage options. For example, your homeowners insurance policy would pay for a hotel room if you had a fire, but your flood insurance policy will not pay for living expenses. The building may be covered at replacement cost, but the personal property in the building may only be covered at actual cash value (the value to buy it minus depreciation). Coverage for property you could have or should have moved out of the lowest levels, to avoid damage, won’t be covered. If you’re a business owner, you won’t get coverage for business interruption.
The National Flood Insurance Program has a maximum limit for residential and commercial dwellings. While your homeowners policy may cover debris removal separately if you had a fire, debris removal is covered in the total limit if your flood insurance policy. Theoretically, if your home were a total loss you may not have enough money left over after debris removal to rebuild your home. This can be remedied by purchasing supplemental flood coverage to sit over your NFIP plan, if there are specialty companies willing to write that coverage for your area.
Is Flood Insurance Mandatory?
If you own your home outright or live in a moderate or low risk area, you are not required by federal law to carry coverage. It is still highly recommended, though, because there are several different types of floods (not all caused by nature) that you may be vulnerable to. Flood insurance tends to be very affordable in low-risk areas so it is worth talking to your agent about.
Those who live in high-risk areas and have a mortgage through a federally insured lender, or through a federal mortgage program, will be required to carry flood insurance. High risk areas are those deemed likely to have a 1 in 4 chance of having a major flood during the course of a standard 30-year mortgage. If you don’t purchase flood insurance you will have a hard time securing a mortgage
Unless you are buying a new property, there is a 30-day waiting period from the date of your application until your NFIP policy goes into effect. This rule is in effect to protect insurance companies from individuals who may wait until they hear a storm is coming to attempt a purchase. A flood could strike at any time. Talk to your insurance professional now to assess your risk and your options.