Flood Insurance

DEFINITION of 'Flood Insurance'

Flood insurance is a financial instrument that protects real property owners from water damage to the structure and contents of their property. While flood insurance can be purchased through many different insurance companies, all policies are federally regulated so the same policy costs the same amount no matter which company it is purchased through.

BREAKING DOWN 'Flood Insurance'

Because typical hazard insurance policies do not cover flooding, the occupant must purchase a separate policy for protection against flood damage. For properties in high-risk areas, lenders sometimes require mortgaged homeowners to carry flood insurance to protect the structure. It is up to the homeowner whether to purchase additional coverage for the property's contents, such as furniture and clothing.

Flood insurance policies are available for homes and commercial properties. Homes financed by a federally backed lender require flood insurance if they are located in a special flood hazard zone. Renters can also purchase flood insurance policies that cover their personal property in a single-family home, apartment, condominium or business property.

The Federal Program

Congress enacted legislation in1968 that established the National Flood Insurance Program (NFIP). The NFIP makes flood insurance available to all homeowners, renters and business owners in participating communities. These communities must adopt and enforce policies that meet or exceed those of the Federal Emergency Management Agency (FEMA) to participate in the program.

The Risks

Flooding occurs regularly within all 50 states. A few inches of flooding in a home can cause thousands of dollars of damage. For people in FEMA's special flood areas, the chances of damage due to flooding are greater than those of fire. However, 20% of flood insurance claims come from properties outside these locations.

Buildings and Contents

The applications for flood insurance all include the option for insuring the building and contents, but purchasing coverage for the contents is optional. Refusing content coverage leaves any personal property in the building uninsured in a flood.

Commercial Properties

Commercial properties are not immune from flood damage and the losses are often greater than those associated with residential flooding. Flooding of a business can result in devastating financial loss, and more than 25% of businesses that close due to floods do not reopen.

Waiting Period

Most flood insurance policies include a 30-day waiting period between the purchase of the policy and start of coverage. Buying a policy because of an approaching storm or because of nearby flooding is not likely to provide coverage for the immediate danger.

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