You May Be Required to Have Separate Flood Insurance Above the Water Damage Coverage In Your Homeowners or Renters Policy
Many renters and homeowners are discovering the importance of having separate flood insurance for their property and personal belongings, and making the prudent decision to purchase it. But some are caught by surprise that flood insurance may actually be required of them in order to secure a loan.
Who’s Required to Have Flood Coverage?
Federal law mandates that all federal or federally related financial assistance for buying or constructing a building in high-risk flood areas be covered by flood insurance. That means any federally-insured bank or lender will require you to purchase flood insurance if you’re in an area more likely to be flooded.
The amount of flood insurance coverage you need based on the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994 is the lesser amount out of:
- The max amount of NFIP coverage available for the particular property type,
- The outstanding principal balance of the loan, or
- The insurable value of the structure.
Property owners in low-to-moderate risk areas aren’t completely off the hook, though. Federal law may not require flood insurance, but lenders may make that call on their own because floods can happen anywhere that has rain and about a quarter of all flood claims come from outside of high-risk areas. Your home is collateral for your mortgage, so if it’s damaged or destroyed in a flood, the lender can take a big financial hit. They typically don’t like to take that risk, so they’ll often require you to purchase flood insurance to get a home loan.
Things can always change, too. If during the life of a mortgage a flood plain map is revised, your lender may call you up and say you now are in a high-risk area and must purchase flood insurance.
Property owners who live in a Special Flood Hazard Area (SFHA), or high-risk area, that have received federal disaster assistance in the form of a federal grant or loan in the past for flood damage are required to have flood insurance for as long as they own the building. If they sell it, they have to tell the buyer about the need to purchase and maintain flood insurance. Not having the required coverage could mean no federal disaster assistance in the event of future damage.
But not all sellers need to disclose flood risks or past flood damage — only those who have received federal disaster assistance in a high-risk area. So if you’re buying a house, don’t automatically assume the seller or agent will tell you about past flood damage or flood zone designation.
Am I Eligible for Flood Insurance?
Most likely, yes. Even if your home has been flooded in the past, you can still purchase flood insurance if your community participates in the National Flood Insurance Program (NFIP). Most communities in the United States that have even a minor risk of flooding do participate, but check on the FEMA website or with your insurance agent to find out if yours does.
If you live somewhere that participates in the NFIP program, you are eligible for flood insurance to cover your home or business, including rentals. You may even qualify for the Preferred Risk Policy, which is a lower-cost flood insurance policy for properties that are outside of high-risk flood areas. Your property does not have to be located in a flood plain to qualify for flood insurance coverage, but it does help to know your risk level and whether or not you qualify for discounts or if you’re required by law to have flood insurance.
How to Know if You’re in a Flood Plain
FEMA provides several types of maps and tools that indicate risk levels, flood plains, and SFHAs based on your location. One particularly useful one is the FEMA Flood Map Service Center, which gives government-identified flood zone information when you type in your address. These maps are continually updated, so it’s important to check back regularly if you’re making decisions regarding flood insurance, or moving properties.
Another mapping option, floodtools.com, offers visually intuitive, color-coded flood risk indicators, educational resources and community benchmarks. This is an interactive tool that can be useful to show exactly where historical flooding has happened, average claims in your area, and how at-risk your property is.
No matter whether your property lands in the middle of a high-risk SFHA or hasn’t seen a flood in more than 50 years, you should still talk to your insurance agent about flood insurance. If you’re anywhere near where rain storms happen, you are at risk.
The independent insurance advisors at Hill & Hamilton are well-versed in flood plains, coverage options and requirements. If you have questions, we’re happy to have a discussion to get you comfortable with the ins and outs of flood insurance, and help you make the decisions that are right for you. Contact us today for more information.