Staying Above Water: The Basics Of Flood Insurance

Nick DiUlio

With a few strokes of his pen, President Obama on July 6, 2012, signed legislation that extends the life of the National Flood Insurance Program for five years. Under the law, the flood insurance program will expire in September 2017; in recent years, the program had been hobbling along under a series of short-term extensions.

Aside from giving the flood insurance program a five-year lease on life, highlights of the law include:

• Raising the cap on annual flood insurance premium increases from 10 percent to 20 percent.
• Imposing minimum deductibles of $1,000 to $2,000 for homeowner’s flood insurance claims.
• Eliminating subsidized insurance rates for properties with repeated flood losses and flood insurance claims.

What is flood insurance?

Now that the future of the National Flood Insurance Program is relatively secure for several years, you may be wondering how the program actually works.

One important item to note is what flood insurance doesn’t do. According to Louis Chiafullo, a partner in the insurance practice at law firm McCarter & English LLP, one of the most common misconceptions about flood insurance is that it’s included in standard homeowner’s policy.

“Many homeowners think it’s a basic part of their coverage,” Chiafullo says. “It’s not.”

Flood insurance is an extra layer of coverage offered through the National Flood Insurance Program (NFIP), which is administered by the Federal Emergency Management Agency (FEMA). In the event of water damage from flooding, the insured homeowner will have coverage up to the legal limits for his or her property.

What does it cover?

According to the NFIP, a homeowner’s flood insurance policy covers up to $250,000 in structural damage and up to $100,000 in content losses. A business policy covers up to $500,000 in both structural damage and content losses.

When talking about flood insurance coverage, it’s important to understand what the word “flood” actually means. Mark Carrasquillo, an agent at insurance brokerage E.G. Bowman Co., says many homeowners don’t have a proper understanding of the terminology and, therefore, don’t fully understand their coverage.

“Many consumers, when discussing or describing a loss, think that the words ‘flood’ and ‘water damage’ are interchangeable and mean the same thing,” Carrasquillo says. “This is entirely wrong. In the insurance world, the terms are very different.”

A flood is defined by the NFIP, in part, as: “A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from overflow of inland or tidal waters, from unusual and rapid accumulation or runoff of surface waters from any source, or from mudflow.”

Water damage, essentially, is everything else. This includes the breaking or cracking of any part of an