Renters insurance includes three important types of financial protection:

• Coverage for Personal Possessions
• Liability Protection
• Additional Living Expenses

The following checklist can help you choose the right coverage when you are shopping around for renters insurance or speaking with your insurance professional.

A. Coverage for Personal Possessions

1. How much insurance should I buy? Make sure you have enough insurance to replace all of your personal possessions in the event of a burglary, fire or other covered disaster.The easiest way to determine the value of all your personal possessions—including furniture, clothing, electronics, appliances, kitchen utensils and even linens—is to create a home inventory. This is a detailed list of all of your personal possessions along with their estimated value. An up-to-date home inventory will also make filing an insurance claim faster and easier. The Insurance Information Institute offers free Web-based home inventory software, available at www.knowyourstuff.org.
2. Should I get replacement cost or actual cash value coverage? An actual cash value policy pays to replace your possessions minus a deduction for depreciation whereas a replacement cost policy will pay the cost of replacing your possessions without accounting for depreciation. The price of replacement cost coverage is about 10 percent more but can be well worth the extra expense as the value of most items tends to depreciate quickly.
3. What disasters are—and are not—covered? Renters insurance covers you against losses from fire or smoke, lightning, vandalism, theft, explosion, windstorm and certain types of water damage (such as when the tenant upstairs leaves the water running in the bathtub and floods out your apartment or a burst pipe). Most renters insurance policies, however, do not cover floods. Flood coverage is available from the federal government’s National Flood Insurance Program (888-379-9531, www.floodsmart.gov) and from a few private insurers. You can get this coverage from the same agent or company representative who sold you the renters insurance policy. Earthquakes are not covered either. You can either get a separate policy or have it added as an “endorsement” to your renters policy, depending on where you live.
4. What is my deductible, and how does it work? A deductible is an amount of money you pay out-of-pocket before the insurance coverage kicks in. Deductibles are available as a specified dollar amount, typically $500, $1000 or $2000, though higher deductibles are available. The larger the deductible, the lower the premium charged for the same amount of coverage, so if you can afford a deductible of at least $1,000, you may get as much as 25 percent off your premium. Remember though, that you will be responsible for paying the deductible each time you file a claim.
5. What is a “floater” and do I need one? If you have expensive jewelry, furs, sports or musical equipment, or collectibles, consider adding a floater to your policy. Most standard renters policies offer only a limited dollar amount for such items; a floater is a separate policy that provides additional insurance for your valuables and covers them if they are accidentally lost. You will need to present receipts and/or appraisals for the items covered by the floater. It is important that expensive items be appraised properly as you will pay a premium based on the appraised value and in the event of a claim, be compensated for this dollar amount. You can ask your insurer to recommend a reputable appraiser. For some items, like laptop computers, a stand-alone policy may also be an option. Check your renters policy first to see whether your laptop is covered and what the deductible is.

B. Liability Protection

1. Do I have enough liability insurance in the event someone sues me?Renters insurance provides liability protection that covers you against lawsuits for bodily injury or property damage done by you, your family members and even your pets. This coverage pays for both the cost of defending you in court and court awards—up to the limit of your policy. Most standard renters insurance policies will generally provide at least $100,000 of liability coverage, but additional amounts are available. Consider whether the amount of liability coverage provided by your policy is sufficient to protect your assets. Did you know you also have no-fault medical coverage as part of the liability protection provided by your renters policy? This coverage is only for injuries sustained by others and is not a substitute for your own health insurance. Medical payments coverage allows someone who gets injured on your property to simply submit his or her medical bills directly to your insurance company so the bills can be paid without resorting to a lawsuit. Most policies include about $1,000 to $5,000 worth of this coverage.
2. Do I need an umbrella liability policy? If you need a large amount of liability protection, you can purchase a personal umbrella liability policy. An umbrella policy kicks in when you reach the limit on the underlying liability coverage provided by your renters or auto policy. It will also cover you for things such as libel and slander. For about $150 to $300 per year, you can buy a $1 million personal umbrella liability policy. The next million will cost about $75 and $50 for every million after that. Because the personal umbrella policy goes into effect after the underlying coverage is exhausted, there are certain limits that usually must be met in order to purchase this coverage. Most insurers will want you to have about $250,000 of liability insurance on your auto policy and $300,000 of liability insurance on your renters policy before selling you an umbrella liability policy for $1 million of additional coverage.

C. Additional Living Expenses

1. If I can’t live in my home after a disaster, will I be covered? If your home is destroyed by a disaster that your policy covers and you need to live elsewhere, renters insurance provides additional living expenses (ALE). ALE pays for hotel bills, temporary rentals, restaurant meals and other expenses you incur while your home is being repaired or rebuilt. It is important to know out how much coverage you have, and what the limits are. Some companies provide coverage for a set amount of time, while others have a financial cap.

D. Other Coverages

1. I run a business out of my home; do I need supplemental coverage? A typical homeowners or renters policy provides only $2,500 coverage for business equipment which is generally not enough to replace all of the equipment required by even a small home business. You may also need coverage for liability and lost income. Insurance companies differ considerably in the types of business coverages they offer. Some may meet the specific needs of your business, while others may not. So it is wise to shop around for coverage options as well as price.
2. Am I covered if I am traveling or away from home? Most renters polices include what is called off-premises coverage. This means that belongings that are outside of your home are covered against the same disasters listed in your policy. For example, property stolen from your car would be covered. However some companies may limit the amount of off-premises theft to 10 percent of the amount of personal possessions insurance. If you think you need additional off-premises theft coverage—for example if you travel a lot—shop around for a policy that has the insurance protection you need.

E. Discounts

Insurance companies often offer discounts on renters insurance if you have another policy with them for your car or business. You can also get discounts if you:

• Have a security system
• Use smoke detectors
• Use deadbolt locks
• Have good credit
• Have multiple policies
• Stay with the same insurer
• Are over 55 years old

Companies offer several types of discounts, but these can vary widely by company and by state, so review your options carefully. Also, some employers and professional associations administer group insurance programs that may offer a better deal than you can get elsewhere.

Related Links: Homeowners and Renters Insurance

Source: Insurance Information Institute, “Renters Insurance Checklist” http://www.iii.org website. Accessed November 30, 2015. http://www.iii.org/articles/renters-insurance-checklist.html

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Dear Valued Customer,

In this issue of the “————————” we focus on annual insurance planning for you and your family. Most of us lead busy lives and our circumstances are always changing, which is why an annual assessment of your personal insurance coverage is vital.

There are many types of insurance coverages that may be right for you, from homeowners to renters; healthcare to disability; term to whole life, and; umbrella to auto insurance, so consider this just a summary review. We urge you to please contact us for a total review and for our professional recommendations.

We appreciate your continued business and look forward to serving you.

Kind regards,

Dear Valued Customer,

In this issue of the “———————“ we focus on how you can save money on your home insurance.

There are smart ways to save on home and auto insurance; however, there are also mistakes that can result in being dangerously underinsured. Mistakes like:

1. Insuring a home for its real estate value rather than for the cost of rebuilding.
2. Selecting an insurance company by price alone.
3. Dropping flood or earthquake insurance
4. Only purchasing the legally required amount of liability for your car
5. Neglecting to buy renters insurance

Please read on to understand this topic fully so you can avoid costly mistakes that can harm you and your family.

We appreciate your continued business and look forward to serving you.

Kind regards,

We are all concerned with saving money and it is important to shop around when looking for insurance coverage. However, simply reducing your coverage or dropping important coverages altogether can leave you dangerously underinsured in the event of a disaster.

You need enough insurance to cover the following:

1. The structure of your home.
2. Your personal possessions.
3. The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs.
4. Your liability to others.

The structure

You need enough insurance to cover the cost of rebuilding your home at current construction costs. Don’t include the cost of the land. And don’t base your rebuilding costs on the price you paid for your home. The cost of rebuilding could be more or less than the price you paid or could sell it for today.

Some banks require you to buy homeowners insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure it’s enough to cover the cost of rebuilding. (If your mortgage is paid off, don’t cancel your homeowners policy. Homeowners insurance protects your investment in your home.)

For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local building costs per square foot. To find out construction costs in your community, call your local real estate agent, builders association or insurance agent.

Factors that will determine the cost of rebuilding your home:

• Local construction costs
• The square footage of the structure
• The type of exterior wall construction–frame, masonry (brick or stone) or veneer
• The style of the house (ranch, colonial)
• The number of bathrooms and other rooms
• The type of roof and materials used
• Other structures on the premises such as garages, sheds
• Fireplaces, exterior trim and other special features like arched windows
• Whether the house, or parts of it like the kitchen, was custom built
• Improvement to your home–adding a second bathroom, enlarging the kitchen or other additions that have added value to your home

Standard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance.

Flood insurance is available from the National Flood Insurance Program – NFIP and from some private insurers. Earthquake coverage is available from private insurance companies or, in California, also through the California Earthquake Authority.

Replacement cost policies
Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation–the decrease in value due to age, wear and tear, and other factors.

If you purchase a flood insurance policy, coverage for the structure is available on a replacement cost basis.

Guaranteed or extended replacement cost coverage
After a major hurricane or a tornado, building materials and construction workers are often in great demand. This can push rebuilding costs above homeowners policy limits, leaving you without enough money to cover the bill. To protect against such a situation, you can buy a policy that pays more than the policy limits.

An extended replacement cost policy will pay an extra 20 percent or more above the limits, depending on the insurance company. A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster.

Building codes
Building codes are updated periodically and may have changed significantly since your home was built. If your home is badly damaged, you may be required to rebuild your home to meet new building codes. Generally, homeowners insurance policies (even a guaranteed replacement cost policy) won’t pay for the extra expense of rebuilding to code. Many insurance companies offer an Ordinance or Law endorsement that pays a specified amount toward these costs. (An endorsement is a form attached to an insurance policy that changes what the policy covers.)

Inflation guard
Consider adding an inflation guard clause to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area.

Older homes
If you own an older home, you may not be able to buy a replacement cost policy. Instead, you may have to buy a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes, like plaster walls and wooden floors, with similar materials, the policy will pay for repairs using the standard building materials and construction techniques in use today.

Insurance companies differ greatly in how they insure older homes. Some won’t insure older homes for the replacement cost because of the expense of re-creating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for the replacement cost as long as the dwelling is in good condition.

If you can’t insure your home for the replacement cost or choose not to do so–in some cases, the cost of replacing a large old home is so high that you might not want to replace it with a house of the same size–make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.

Your personal possessions

Most homeowners insurance policies provide coverage for your personal possessions for approximately 50 percent to 70 percent of the amount of insurance you have on the structure or “dwelling” of your home. The limits of the policy typically appear on the Declarations Page under Section I, Coverages, A. Dwelling.

To determine if this is enough coverage, you need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire (for more information see How do I take a home inventory and why). If you think you need more coverage, contact your agent or insurance company representative and ask for higher limits for your personal possessions.

Replacement Cost or Actual Cash Value
You can either insure your belongings for their actual cash value, which pays to replace your home or possessions minus a deduction for depreciation up to the limit of your policy. Or you can opt for replacement cost, which pays the actual cost of replacing your home or possessions (no deduction for depreciation) up to the limit of your policy.

Suppose, for example, a fire destroys a 10-year-old TV set in your living room. If you have a replacement cost policy for the contents of your home, the insurance company will pay to replace the TV set with a new one. If you have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies also replace the item and deliver it to you.

Generally, the price of replacement cost coverage is about 10 percent more than that of actual cash value. If you need a flood insurance policy for your belongings, it is only available on an actual cash value basis.

Insuring expensive items with floaters/endorsements
There may be limits on how much coverage you get for expensive items such as jewelry, silverware and furs. Generally, there is a limit on jewelry for $1,000 to $2,000. You should ask your agent or look it up in your policy. This information is in Section I, Personal Property, Special Limits of Liability. Insurance companies may also place a limit on what they will pay for computers.

If the limits are too low, consider buying a special personal property floater or an endorsement. These allow you to insure these items individually or as a collection. With floaters and endorsements, there is no deductible. You are charged a premium based on what the item (or collection) is, its dollar value and where you live.

You can determine the value by providing your agent with a recent receipt or getting the item or collection appraised.

Additional living expenses after a disaster

This is a very important feature of a standard homeowners insurance policy. This pays the additional costs of temporarily living away from your home if you can’t live in it due to a fire, severe storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt.

Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20% of the insurance on your house. Some companies will even sell you a policy that provides you with an unlimited amount of loss of use coverage, for a limited amount of time.

If you rent out part of your house, this coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.

You should talk to your agent or company to make sure you know exactly how much coverage you have and how long the coverage will be in effect. In most cases, you can increase this coverage for an additional premium.

Liability to others

This part of your policy covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by pets. It pays for both the cost of defending you in court and for any damages a court rules you must pay.

Generally, most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. Increasingly, it is recommended that homeowners consider purchasing at least $300,000 to $500,000 worth of coverage of liability protection.

Umbrella or Excess Liability.
You should buy enough liability insurance to protect your assets. If you own property and or have investments and savings that are worth more than the liability limits in your policy, you may consider purchasing an excess liability or umbrella policy.

Umbrella or excess liability policies provide extra coverage. They start to pay after you have used up the liability insurance in your underlying home (or auto) policy. An umbrella policy is not part of your homeowners policy. You have to purchase it separately. In addition to providing a higher dollar amount, they offer broader coverage. You are covered for libel, slander, and invasion of privacy. These things are not covered under standard homeowners or auto policies.

The cost of an umbrella policy depends on how much underlying insurance you have and the kind of risk you represent. The greater the underlying liability coverage, the cheaper the policy. This is becaue you would be the less likely to need the additional insurance. Most companies will require a minimum of $300,000 on your home and your car, if you own one.

Source: Insurance Information Institute, “How much homeowners insurance do I need?” http://www.iii.org website. Accessed December 2, 2015. http://www.iii.org/article/how-much-homeowners-insurance-do-i-need

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Shopping for your dream house? There are many considerations when looking at real estate, such as property taxes, school district, available recreational opportunities in the neighborhood, to name a few.

1. Have there been any past problems in the home?
2. If damage has occurred, was it properly repaired?

• check the general condition of the home;
• look for water damage, termites and other types of infestation;
• pay special attention to the electrical system, septic tank and water heater;
• show you where potential problems might develop;
• double-check that past problems have been repaired;
• suggest upgrades or replacements that may be needed.

• Replacement cost for personal possessions
• Extended or guaranteed replacement cost for the structure
• Building code upgrades
• Sewer and drain back-up coverage
• Inflation-guard
• Umbrella coverage for a pool or other high-risk items
• Special riders for jewelry, collectibles and expensive items

• Multi-policy (home, car or other policies with the same company)
• Smoke detectors
• Fire extinguishers
• Sprinkler systems
• Burglar and fire alarms that alert an outside service
• Deadbolt locks and fire-safe window grates
• Being 55 years old and/or retired
• Long-time policyholder
• Upgrades to plumbing, heating and electrical systems
•  Earthquake retrofitting to make the home safer
• Wind-resistant shutters

Additional Resources

• ChoicePoint
• CLUE reports
• Fair Isaac
• To order a credit report, MyFICO.com
• For help in determining your credit score, call 800-777-2066
• Institute for Business & Home Safety
• ISO
  -To order a copy of your A-PLUS report, call 800-709-8842
  -For up-to-date information on fire protection services throughout the country, see the Public Protection Classification program
• National Flood Insurance Program
• Flood
• Hurricane and Windstorm Deductibles
• Residual Markets
• What Is Covered by a Standard Homeowners Policy?
• Earthquake

Flooding is the most common and costly natural disaster in the United States, causing an average of $50 billion in economic losses each year. Most U.S. natural disasters declared by the President involve flooding.

There is no coverage for flooding in standard homeowners or renters policies or in most commercial property insurance policies. Coverage is available in a separate policy from the National Flood Insurance Program and from a few private insurers. Despite efforts to publicize this, many people exposed to the risk of floods still fail to purchase flood insurance.

The widespread flooding associated with Hurricane Katrina in 2005, the Mississippi floods of 2011 and Hurricane Irene and superstorm Sandy in 2012 set in motion a debate about how to improve the federal program.

RECENT DEVELOPMENTS

• National Flood Insurance Reform: In March 2014 Congress rescinded many of the rate increases called for by The Biggert-Waters Flood Insurance Reform Act, passed two years earlier. The original act sought to make the federal flood insurance program more financially self-sufficient by eliminating rate subsidies – discounts that many property owners in high-risk areas receive.
• According to the New Orleans Times-Picayune, the 2014 law prevents any policyholder from seeing an annual rate increase exceeding 18 percent. It calls on the flood program’s administrator, the Federal Emergency Management Agency, to “strive” to prevent coverage from costing more than 1 percent of the amount covered. In other words, if the policy offered $100,000 of coverage, the premium would not exceed $1,000.
• The law also reinstates a practice known as grandfathering, meaning that properties re-categorized as being at a higher risk of flooding under FEMA’s revised maps would not be subject to large increases.
• It also ends a provision in Biggert-Waters that removed a subsidy once a home was sold. People who purchased homes after Biggert-Waters became law will receive a refund. Many lawmakers in coastal states were concerned that the higher cost of flood insurance would have a negative impact on the real estate industry.
• The subsidy will now be covered by a $25 surcharge on homeowners flood policies and a $250 surcharge on insurance for non-residential properties and secondary (vacation) homes.
• According to data from FEMA, most current flood insurance policyholders (81 percent, or 4.5 million) pay rates based on the true risk of flood damage and so were not affected by Biggert-Waters or the subsequent rollback. Properties most affected by the rate hikes were in high-risk flood zones; were built before communities adopted their first Flood Insurance Rate Map; or were second homes; or are second homes that have not been elevated. Others affected include businesses and those who live in homes that have been repeatedly flooded.
• In June 2014 Florida enacted a law that encourages private companies to offer flood insurance. The legislation permits four types of flood coverage – a standard policy, which resembles National Flood Insurance Program coverage, and three enhanced policies. To encourage market growth, the law allows insurers to file their own rates until October 1, 2019. After that, rates will be subject to regulatory approval.
• Policies in Force: While the number of flood policies in force is growing, a significant portion of the population at risk of flooding still is not insured for flood damage, as the flooding in the Midwest in the spring of 2008 and from superstorm Sandy in 2012 revealed. The latest available data show that in 2013, there were nearly 5.6 million policies in force, compared with 5.0 million in 2005, the year of hurricanes Katrina and Rita. Premiums grew to $3.5.billion in 2013, from $2.2 billion in 2005. In 2013, 16,854 claims were paid, compared with 148,448 claims in 2012 and 213,290 in 2005. The cost of claims was $441 million in 2013, compared with $8.8 billion in 2012 and $17.8 billion in 2005.
• Flood Re in the U.K.: In June 2013 the British government adopted a new approach to flood insurance, ending a longstanding voluntary agreement with the Association of British Insurers to supply flood insurance through the private market. The private market will continue to write flood insurance, but premiums will be capped. The highest-risk policies will be reinsured by Flood Re, an industry-run, not-for-profit organization. All U.K. household insurers will pay an assessment to fund excess Flood Re losses.

BACKGROUND

The National Flood Insurance Program: Before Congress passed the National Flood Insurance Act in, the national response to flood disasters had been to build dams, levees and other structures to hold back flood waters, a policy that may have encouraged building in flood zones.

The National Flood Insurance Act created the National Flood Insurance Program (NFIP), which was designed to stem the rising cost of taxpayer funded relief for flood victims and the increasing amount of damage caused by floods. The NFIP has three components: to provide flood insurance, floodplain management and flood hazard mapping. Federal flood insurance is only available where local governments have adopted adequate floodplain management regulations for their floodplain areas as set out by NFIP. More than 20,000 communities across the country participate in the program. NFIP coverage is also available outside of the high-hazard areas.

The law was amended in 1969 to provide coverage for mudslides and again in 1973. Until then, the purchase of flood insurance had been voluntary, with only about one million policies in force. The 1973 amendment put constraints on the use of federal funds in high-risk floodplains, a measure that was expected to lead to almost universal flood coverage in these zones. The law prohibits lenders that are federally regulated, supervised or insured by federal agencies from lending money on a property in a floodplain zone when a community is participating in the NFIP, unless the property is covered by flood insurance. The requirement for flood insurance also applies to buildings that receive financial assistance from federal agencies such as the Veterans Administration. However, because the initial mortgage on the property is frequently sold by the originating bank to another entity, enforcement of this law has been poor.

Legislation was enacted in 1994 to tighten enforcement of flood insurance requirements. Regulators can now fine banks with a pattern of failure to enforce the law, and lenders can purchase flood insurance on behalf of homeowners who fail to buy it themselves, then bill them for coverage. The law includes a provision that denies federal disaster aid to people who have been flooded twice and have failed to purchase insurance after the first flood.

Buildings constructed in a floodplain after a community has met regulations must conform to elevation requirements. When repair, reconstruction or improvement to an older building equals or exceeds 50 percent of its market value, the structure must be updated to conform to current building codes. A 2007 NFIP study on the benefits of elevating buildings showed that due to significantly lower premiums, homeowners can usually recover the higher construction costs in less than five years for homes built in a “velocity” zone, where the structure is likely to be subject to wave damage, and in five to 15 years in a standard flood zone. The Federal Emergency Management Agency (FEMA) estimates that buildings constructed to NFIP standards suffer about 80 percent less damage annually that those not built in compliance.

How It Works: The NFIP is administered by FEMA, now part of the Department of Homeland Security. Flood insurance was initially only available through insurance agents who dealt directly with the federal program. The “direct” policy program has been supplemented since 1983 with a private/public cooperative arrangement, known as “Write Your Own,” through which a pool of insurance companies issue policies and adjust flood claims on behalf of the federal government under their own names, charging the same premium as the direct program. Participating insurers receive an expense allowance for policies written and claims processed. The federal government retains responsibility for underwriting losses. Today, most policies are issued through the Write-Your-Own program but some non-federally backed coverage is available from the private market.

The NFIP is expected to be self-supporting in an average loss year, as reflected in past experience. In an extraordinary year, as Hurricane Katrina demonstrated, losses can greatly exceed premiums, leaving the NFIP with a huge debt to the U.S. Treasury that it is unlikely to be able to pay back. Hurricane Katrina losses and the percentage of flood damage that was uninsured led to calls for a revamping of the entire flood program.

Flood adjusters must be trained and certified to work on NFIP claims. NFIP general adjusters typically reexamine a sample of flood settlements. Insurers that fail to meet NFIP requirements must correct problems; otherwise they can be dropped from the program.

As with other types of insurance, rates for flood insurance are based on the degree of risk. FEMA assesses flood risk for all the participating communities, resulting in the publication of thousands of individual flood rate maps. High-risk areas are known as Special Flood Hazard Areas or SFHAs.

Flood plain maps are redrawn periodically, removing some properties previously designated as high hazard and adding new ones. New technology enables flood mitigation programs to more accurately pinpoint areas vulnerable to flooding. As development in and around flood plains increases, run off patterns can change, causing flooding in areas that were formerly not considered high risk and vice versa.

People tend to underestimate the risk of flooding. The highest-risk areas (Zone A) have an annual flood risk of 1 percent and a 26 percent chance of flooding over the lifetime of a 30-year mortgage, compared with a 9 percent risk of fire over the same period. In addition, people who live in areas adjacent to high-risk zones may still be exposed to floods on occasion. Ninety percent of all natural disasters in this country involve flooding, the NFIP says. Since the inception of the federal program, some 25 to 30 percent of all paid losses were for damage in areas not officially designated at the time of loss as special flood hazard areas. NFIP coverage is available outside high-risk zones at a lower premium.

Flood insurance covers direct physical losses by flood and losses resulting from flood-related erosion caused by heavy or prolonged rain, coastal storm surge, snow melt, blocked storm drainage systems, levee dam failure or other similar causes. To be considered a flood, waters must cover at least two acres or affect two properties. Homes are covered for up to $250,000 on a replacement cost basis and the contents for up to $100,000 on an actual cash value basis. Replacement cost coverage pays to rebuild the structure as it was before the damage. Actual cash value is replacement cost minus the depreciation in value that occurs over time. (Excess flood insurance is available in all risk zones from some private insurers for NFIP policyholders who want additional coverage or where the homeowner’s community does not participate in the NFIP.) Coverage for the contents of basements is limited. Coverage limits for commercial property are $500,000 for the structure and another $500,000 for its contents.

To prevent people from putting off the purchase of coverage until waters are rising and flooding is inevitable, policyholders must wait 30 days before their policy takes effect. In 1993, 7,800 policies purchased at the last minute resulted in $48 million in claims against only $625,000 in premiums.

Proposals for Change: In a final report published in 2006 by the American Institutes for Research (AIR), which conducted an evaluation of the federal flood insurance program, AIR said that although much had been accomplished, the program fell short of meeting its goals in part because the NFIP did not have the ability to guide development away from floodplains and cannot restore beneficial floodplain functions once they have been impaired. In addition, AIR said, many people still are not covered or not adequately covered for flood damage. AIR also noted that the NFIP was hampered in reaching its goals by insufficient Congressional funding, lack of pertinent data, misperceptions about the nature of the program and the breakdown in coordination among its three major sectors.

A report published by FEMA in 2007 suggests that development patterns should be changed to protect environmentally sensitive areas and that communities in the flood program should be encouraged or required to ban development in these locations.

Another criticism of the NFIP is that it does not charge enough for coverage. Among the reasons for the premium shortfall is that the cost of coverage on some dwellings is subsidized- those that were built before floodplain management regulations were established in their communities. As a result, the premiums paid for flood coverage by the owners of these properties reflect only 30 to 40 percent of the true risk of loss.

Over time. lawmakers considering legislation to renew authorization of NFIP have proposed many changes that would have increased the NFIP’s future income, including making owners of property subject to repetitive flooding pay premiums that more closely reflect the true cost of their losses and gradually eliminating the flood insurance subsidy for vacation and second homes. In addition, they would have allowed higher premium increases to make the program eventually self-sustaining.

Flood Coverage in Other Countries: There are two basic methods of providing flood insurance in developed countries. Under the first, the optional system, insurers extend their standard policy to include supplemental coverage for flood damage on payment of additional premium. The coverage tends to be expensive due to the fact that only those most likely to be flooded, and therefore to file claims, purchase it, a situation known in the insurance industry as adverse selection. Among the countries with optional coverage are Germany and Italy. The other method is “bundling.” Under this system, flood coverage is combined with coverage for other perils such as fire and windstorm, thus spreading the risk of flood losses across a large geographical area and greatly increasing the percentage of the population covered for flood damage. Countries that have adopted this method include the United Kingdom, Spain and Japan. In addition, in some countries such as France and Spain there are government compensation programs for major disasters, including flooding, that take effect when the cost of a disaster reaches a certain level. The system in the United States is unique in that the government underwrites the coverage and private insurers act as administrators bearing no actual flood risk.

KEY SOURCES OF ADDITIONAL INFORMATION

The National Flood Insurance Program Community Status Book

Source: Insurance Information Institute, “Flood Insurance” http://www.iii.org website. Accessed November 30, 2015. http://www.iii.org/issue-update/flood-insurance

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.