What is flood insurance, and why do you need it?

Highlands, New York, was underwater and under a state of emergency as devastating floods swept the area this weekend. Gov. Kathy Hochul warned of “life-threatening flooding,” and nearby West Point saw a 1-in-1000-year rainfall on Sunday afternoon, totaling nearly eight inches in six hours. Some drivers swam out of their cars to safety, and 13,000 homes lost power.

But only four property owners in the entire town have active flood insurance policies.

That’s according to the most recent data from the Federal Emergency Management Agency (FEMA), which runs the program. That means the overwhelming majority of homeowners cleaning up from the flood are discovering that their homeowners policies will not compensate them for the damage caused by the massive storm.

Massive amounts of rainfall triggering floods in the Northeast — and predictions of more extreme weather this year — are a deadly reminder of the importance of flood insurance.

But while the policies can be vital in protecting many households’ largest assets, flood insurance is still poorly understood and often passed over. Here’s what you need to know about it.

What is flood insurance?

Flood insurance is a type of policy that protects renters, homeowners, and business owners from damage caused by flooding.

These policies are not usually included in homeowners insurance, but they can cover harm to the integrity of the building itself and loss of belongings inside. Flood insurance for renters only covers the contents of their home.

In the United States, FEMA has traditionally provided all flood insurance plans through the National Flood Insurance Program (NFIP). That means that even a plan through a company like GEICO is backed by the federal government.

“Flooding is the most common disaster across America,” said David Maurstad, senior executive of the National Flood Insurance Program. “Insured survivors are more resilient and recover more quickly following a disaster.

Is FEMA flood insurance enough?

Under FEMA policies, coverage for single-family homes is capped at $250,000 for a building’s damage and $100,000 for its contents. For businesses, the maximum coverage is $500,000 for each.

If flooding damages your home beyond repair, this amount may not be enough to rebuild. In that case, it may be important to consider private flood insurance options. In the past few years, these providers have carved out a niche in the flood insurance market by offering more coverage and higher limits than the federal plans.

Who can get flood insurance?

Virtually every property owner in the US can get FEMA flood insurance, but those living in higher risk areas may be required to purchase a plan.

For example, much of Miami is considered a Special Flood Hazard Area. In those places, flood insurance is mandatory for any property owner with a federally backed mortgage. However, there are many people living in flood zones or areas with moderate risk who either choose not to get flood insurance or opt to let their policy lapse.

According to the Insurance Information Institute, an industry trade group, Florida, Louisiana and Texas account for 40% of all flood insurance policies nationwide.

But it’s not just coastal states that need to be vigilant.

“We tend to focus on big hurricanes that capture the headlines, but inland flooding is just as frequent as coastal flooding,” said Laura Lightbody, director of energy modernization and flood-prepared communities at the Pew Charitable Trusts.

“Since the start of 2022, inland states accounted for 6 of the top 10 states that experienced the most flood-related disasters,” she said.

Why isn’t flood insurance included in my homeowners policy?

Homeowners insurance typically covers wind, fire, and theft, but excludes floods and earthquakes.

“These latter two were seen as risks occurring so randomly and causing such extensive losses that over time the industry has sold these policies separately,” said Michael Barry, the Insurance Information Institute’s spokesperson.

The origin of this exclusion can be traced to the 1968 National Flood Insurance Act, which established the NFIP. At the time, according to Barry, private insurers were unable to price policies that properly reflected risk, so the federal government stepped in to subsidize them.

FEMA was able to underprice the policies compared to what private companies would charge.

How much does a policy cost?

Like other types of insurance, these premiums increase alongside perceived risk. For example, in Miami, flood insurance can sometimes rival the amount that people pay for homeowners insurance, according to the Insurance Information Institute. However, payouts for people with coverage can be tens of thousands of dollars.

In areas where flooding has generally been less likely, insurance may be cheaper. That’s not to say that these regions are flood-proof, though.

“According to research, more than 14 million properties are at risk of a [100-year flood], nearly double what FEMA designates as a ‘Special Flood Hazard Area,’” said Lightbody.

Should I get flood insurance?

According to FEMA, one inch of floodwater can cause up to $25,000 worth of damage.

The agency maintains a searchable map database that designates certain communities as high- or low-risk. FEMA defines a high-risk area as one with at least a 1-in-4 chance of flooding at some point during a 30-year mortgage period.

But it also warns that flooding can happen anywhere and for many reasons, including nearby construction and poor sewer maintenance.

According to Lightbody, FEMA’s map is “not predictive. It’s sort of a snapshot in time where they can model where there is risk.” She added that that risk could have also increased in the past decade due to climate change, population growth, and new developments in cities and towns.

“The more buildings, structures and homes there are, the less green space to absorb floodwaters,” Lightbody noted. “If that water has nowhere else to go, it’ll go into homes.”

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