Flood insurance

Flood insurance denotes the specific insurance coverage against property loss from flooding. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowlands and floodplains that are susceptible to flooding.

Hidden Floods

Nationwide, only 20% of American homes at risk for floods are covered by flood insurance. Private insurers are unable to insure against the peril of flood due to the prevalence of adverse selection, which is the purchase of insurance by persons most affected by the specific peril of flood. In traditional insurance, insurers use the economic law of large numbers to charge a relatively small fee to large numbers of people in order to pay the claims of the small numbers of claimants who have suffered a loss. Unfortunately, in flood insurance, the numbers of claimants is larger than the available number of persons interested in protecting their property from the peril, which means that insurers are unable to cover their costs in flood insurance.

In certain flood-prone areas, the Federal Government requires flood insurance to secure mortgage loans backed by federal agencies such as the FHA and VA. However, the program has never worked as insurance, because of adverse selection. It has never priced people out of living in very risky areas by charging an appropriate premium, instead, too few places are included in the must-insure category, and premiums are artificially low." [" [http://www.time.com/time/magazine/article/0,9171,1229102,00.html Floods, Tornadoes, Hurricanes, Wildfires, Earthquakes... Why We Don't Prepare.] " By Amanda Ripley. Time. August 28, 2006.] The lack of flood insurance can be detrimental to many homeowners who may discover only after the damage has been done that their standard insurance policies do not cover flooding.

Flooding is defined by the National Flood Insurance Program as a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or two or more properties (at least one of which is your property from: Overflow of inland waters, unusual and rapid accumulation or runoff of surface waters from ANY SOURCE, and mudflows. [http://www.fema.gov/pdf/nfip/manual200805/15pol.pdf]

This can be brought on by landslides, a hurricane, earthquakes, or other natural disasters that influence flooding, but while a homeowner may, for example, have earthquake coverage, that coverage may not cover floods as a result of earthquakes.

In the United States

Many insurers in the US do not provide flood insurance in accordance to the risk factors established in some portions of the country. In response to this, the federal government created the controversial National Flood Insurance Program which serves as the insurer of last resort.

The National Association of Insurance Commissioners (NAIC) found that 33 percent of U.S. heads of household still hold the false belief that flood damage is covered by a standard homeowners policy. FEMA states approximately 50% of low flood zone risk borrowers think they are ineligible and CAN NOT buy flood insurance. Anyone can buy flood insurance as long as their community participates in the NFIP, even renters.

If you are eligible, you must purchase a separate flood insurance policy through an insurance company that participates in the National Flood Insurance Program (NFIP). Flood insurance is available for residents of approximately 19,000 communities nationwide.

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