Private Flood insurance: is it for you?

Most of us have Flood insurance through the National Flood Insurance Program (NFIP), which is part of FEMA -the Federal Emergency Management Association.

The NFIP continues to be a great resource that allows banks to lend money in flood-prone areas.

The NFIP’s solvency has come under pressure in recent years based on catastrophic losses due to hurricanes like Katrina, Sandy, and Harvey.

The NFIP deficit is in the $Billions and the only way to pay claims is to borrow this money from the Federal Government. Something needed to be done to close the deficit.

The Biggert-Waters Act of 2012

Under the Biggert-Waters Act, Congress mandated FEMA to allow premiums to rise to reflect the true risk of living in high-risk flood areas.

FEMA decided that the first step toward financial solvency was to make the flood insurance rates “Actuarily Sound”.

This means that the price charged for flood insurance should reflect the possibility of losses in that geographical flood zone.

Historically, homeowners in flood-prone coastal areas were paying the same rates as homeowners in less flood-prone inland areas.

This was great for the coastal homeowners as it kept their flood rates low.

But not so great for inland homeowners who subsidized coastal homeowners.

Many of who were well-off financially and lived in virtual mansions on the coast.

Coastal Homes See Major Increase

When homes coastal areas were actuarily matched to the possibility of flooding, these rates skyrocketed.

How much did flood insurance go up in coastal areas?

In some coastal areas of Long Island and New Jersey, rates went from $500 annually to more than $10,000!

Of course, this led to a backlash. Some of these properties belonged to middle-class families who passed these homes from generation to generation.

Some homes also belonged to politicians. Can you imagine their surprise?

So Congress (and FEMA) relented and decided that the impact was too big a shock.

FEMA decided to implement the actuarily sound rates a little at a time.

Of course, new owners would need to pay the new rates, but at least they could plan for it and not priced out of their existing homes.

Some Inland Homes Also Increased

Besides charging actuarial rates based on Flood Zone, another subtle change resulted in higher prices for some NFIP policies.

Flood rates are based on the difference between the lowest floor elevation of a structure and the highest adjacent grade of the land around the building.

So if your lowest floor has an elevation of 9 feet and the highest adjacent grade near your home is 8 feet, your elevation would be +1 (1 foot higher than where the floodwaters normally flow). A +1 elevation would get you reasonable rates.

If you have an 8.4 lowest floor, and the same 8 foot highest adjacent grade, you would be considered +0 for flood elevation. If any number falls below .5, it gets rounded down to the next whole number.

Up until the Biggert-Waters Act changed the rules, your +0 would get very similar rates to a +1.

Nowadays, +0 rates are considerably higher than +1 rates, so these homes are seeing dramatic increases too.

Enter Private Flood Insurance.

Most insurance companies did not offer private flood insurance because it made no sense to compete with the NFIP and its low rates.

Especially when they considered the actual risk of flooding in those coastal areas and those homes that were less than a foot above the flood levels.

As a result of the “Actuarily Sound” requirement, and the resulting increased rates, many insurance companies have taken a new look at providing “Private” flood insurance.

As rates march past the $1000 a year mark, insurance companies saw an opportunity to make a profit, and we are seeing a proliferation of Private Flood Insurance offerings.

In February 2019, the Biggert-Waters Act was amended to allow banks and other lending institutions to accept Private Flood insurance to fulfill Flood insurance requirements for home loans.

Let’s start by comparing the two programs.

Private Flood vs National Flood insurance program

How does Private Flood compare with a regular Flood policy from the National Flood Insurance Program?

Maximum Limits: The maximum limit of NFIP policies is $250,000 of Dwelling Coverage and $100,000 for Contents*. A typical Private Flood policy offers $1.25 million in Dwelling, $875,000 in Contents, $125,000 in Other Structures, and $250,000 in Additional living expenses. So you can buy more coverage with Private Flood.

*Excess Flood is available through the NFIP as a separate policy but would be limited to Dwelling and Contents coverage.

Flood definition: The NFIP requires two or more acres of normally dry land or two or more properties (one of which is the insured’s) to be flooded before they consider it a Flood and cover a claim. Private Flood has a simple definition that dovetails with the standard homeowner wording. Usually, if it comes from outside in under the doors of the dwelling, it”s considered a flood.

Covered Structures: NFIP only covers detached garages up to 10% of the dwelling limit, reducing the main limit of indemnity for buildings. Private Flood covers other structures for 10% of the dwelling limit, which is in addition to the main limit of indemnity for buildings.

Materials and supplies: must be stored within a “fully enclosed” building under the NFIP. There is no stipulation that materials and supplies must be stored within a “fully enclosed” building with Private Flood.

Fixtures: NFIP has restrictions on listed items of fixed property. Private Flood covers the dwelling, materials, and supplies on, or next to the residence premises.

Personal Property: NFIP only covers property “inside” a building. Private Flood covers property anywhere in the world (including in a basement).

Loss avoidance measures: NFIP pays $1000 towards the cost of protecting a property from imminent danger of flood. Private Flood can pay $2500 towards the cost of protecting the property.

Alternative accommodation: No payment from NFIP. Private Flood will pay up to the time of repair or permanent relocation.

Rental value offered: Not offered through NFIP. Private Flood can cover rental value.

Waiting period: The NFIP has a 30 day waiting period before the policy becomes effective (unless it’s required for a new home loan closing). Private Flood can be bound the same day.

When should you buy private flood insurance?

You should consider Private Flood insurance when:

  • You are in a coastal area subject to wave action like a V flood zone.
  • Your house is below (-1 or +0) the highest adjacent grade level.
  • Your NFIP policy has lapsed and you can’t wait the 30 days.
  • If your premium is more than $1000 annually, it would be worth shopping for Private Flood insurance.
  • You want coverage for Other Structures.
  • You want coverage for Alternative Accomodation Expenses.

Keep in mind that you can write Dwelling only with both NFIP and Private Flood policies. So if you only want to satisfy the lender requirements, you can.

If you have any questions about Flood insurance in general, or Private Flood insurance in particular, contact Cronin Insurance and we’ll get you the answer.

Cronin Insurance, low rates, choice of companies and personal advice.

When it comes to Flood Insurance, Cronin Insurance is the Wise Choice.


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