Flood Insurance: Myths and Misconceptions

Homebuyers usually have to purchase homeowners' insurance if they plan on taking out a mortgage on their property. However, standard homeowners' insurance doesn't cover flooding, so homeowners at risk must purchase flood insurance coverage. Buyers should do their homework on flood insurance, since there are several myths and misconceptions about this product.

Consumers Must Purchase Private Flood Insurance

One common misconception about flood insurance is that consumers must purchase the insurance from a private insurance carrier. In fact, a federally regulated program, called the National Flood Insurance Program (NFIP), offers the most common flood insurance policies. A prospective policyholder can purchase two types of coverage — one that insures the value of a home up to $250,000 and another type that covers personal property up to $100,000. Buyers who require more than $250,000 of coverage on their homes must purchase excess flood insurance through a private carrier. Some private insurance carriers offer a purely private policy, but these policies cost more than NFIP policies and often only insure properties worth more than $1 million. Furthermore, many mortgage companies won't accept private flood insurance, since it carries greater risks than the federal program.

Consumers Pay One Flat Rate

Another myth about flood insurance cost is that all buyers pay the same flat rate. Although the average one-year premium for flood insurance is $600, buyers should consult an insurance agent for an actual quote. Factors such as the amount of coverage, the deductible, the flood risk of the area and the condition and age of the building, impact the cost of coverage.

Flood Insurance Covers All Damages

What does flood insurance cover? One myth about flood insurance is that a flood policy covers all types of damage. Buyers of flood insurance should understand what exactly flood insurance covers in the event of an incident. A property policy from the NFIP covers the foundation of the home, electrical and plumbing, air conditioners, water heaters, furnaces, kitchen appliances, permanent carpeting, permanent wallboard and paneling, permanent cabinets and bookcases, window blinds, detached garages (limited to 10% of the home policy) and debris removal. An NFIP personal property policy covers clothing, furniture, electronic equipment, curtains, window air conditioning units, portable microwaves and dishwashers, carpets not covered by the property policy, washers, dryers, freezers, frozen food and up to $2,500 in valuables, such as furs or jewelry.

NFIP policies do not cover precious metals, stock certificates, bearer bonds and cash. They also do not cover trees, plants, wells, septic systems, walkways, decks, patios, fences, hot tubs, swimming pools, boathouses, retaining walls, storm shelters, temporary housing, loss of income, cars or mold damage.

Only Flood-Zone Residents Need Coverage

Another misconception about flood insurance is that only people in high-risk flood areas need coverage. In fact, residents outside of high-flood areas receive one-third of disaster relief for flooding and over 20% of flood insurance claims. Flooding is the most common type of natural disaster in the country, and all 50 states face risks. Buyers in high-risk zones, known as special hazard flood areas, must purchase flood insurance in order to qualify for a mortgage. However, buyers outside of those areas may also wish to purchase a policy. Homebuyers should consult the Federal Emergency Management Agency (FEMA) website to find out if their property is in an area that participates in the NFIP program. Since flooding impacts every state, almost all areas are eligible for coverage. Buyers outside of special hazard flood areas must assess their ability to withstand the financial loss from flooding. One resource that they can consult is the FloodSmart website. Homeowners can enter their address and receive estimates of their risk and their premiums, and a list of agents who serve their area.

All Excess Water Constitutes Flooding

Many people mistakenly believe that all excess water on a property constitutes a flood. In fact, water must either cover at least two acres of normally dry land or damage at least two or more properties in order to constitute a flood. In addition, the water must come from overflowing inland or tidal waters, rapid accumulation or runoff of surface waters, mudflows or shore front land collapses. Flood insurance does not cover water and seepage from sewer or drain backups.