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Before the deluge: Why to buy flood insurance

Who needs flood insurance?  According to the Federal Emergency Management Agency, the answer is simple: Everyone, everywhere—flash floods occur in all 50 states.  It is their mantra. 
A home in Bay St. Louis, Miss., lies in ruin after Hurricane Katrina. In some areas where flood insurance is considered mandatory, only 50 percent of homeowners actually carry a policy.
A home in Bay St. Louis, Miss., lies in ruin after Hurricane Katrina. In some areas where flood insurance is considered mandatory, only 50 percent of homeowners actually carry a policy.John Brecher / file
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Who needs flood insurance?  According to the Federal Emergency Management Agency, which oversees the National Flood Insurance Program, the answer is very simple: everyone, everywhere. Flash floods occur in all 50 states.  It is their mantra. 

While floods happen naturally and nationally, insurance coverage does not. In  the aftermath of Hurricane Katrina, homeowners are probably more aware that their policies may cover water damage, as would some hurricane policies, but “neither homeowners insurance nor renters insurance cover flood damage,” says Butch Kinerney, a spokesperson for FEMA in Washington D.C.

A decision in a widely watched federal lawsuit in Mississippi Tuesdau underscored that fact, as U.S. District Judge L.T. Senter Jr. ruled that almost all the damage to the plaintiffs' home was caused by water and therefore not covered by their homeowners insurance.

Buying flood insurance is easy — much easier than understanding exactly why everyone needs it. With only one game in town pricing is standard. A list of agents who sell the NFIP policies may be found on the FEMA-run website,

Anyone living in one of the 20,000 communities participating in the NFIP’s floodplains management program qualifies for coverage, regardless of their risk for flooding.  Only those living in communities designated coastal barrier resource system areas are excluded.

NFIP policies cannot be canceled — “except for fraud or non-payment,” says Kinerney — and there is no limit to the claims that may be filed for any one property or by any individual.  Also, claims are not reported to the insurance industry’s database. The only limitation is a 30-day waiting period before a policy takes effect.  However, policies taken out because a mortgage company requires it take effect immediately upon closing.

A hard sell
While obtaining the insurance is fairly straightforward, understanding what one’s flood risk is and whether the policy warrants the cost is not so easy. Even those in the highest risk group, for whom coverage is mandatory, have trouble recognizing the value.

According to a 2006 RAND Corp. study, even in areas of the Northeast and Midwest where flood insurance is considered mandatory for mortgage holders, only 45 to 50 percent of households have the coverage. In flood-prone areas of the South and West up to 90 percent of households have flood insurance, according to the study.

Of those living near flood-prone areas where coverage is not mandatory, only 20 percent buy it. Yet FEMA insists it is a matter of ‘when’ not ‘if’ a flood will occur for these folks.

Such high-risk dwellers face a 26 percent chance of being flooded during the span of a 30-year mortgage.  Supporters of flood insurance note these same homeowners insure against fire but face only a 9 percent chance of experiencing a loss due to a blaze during that same 30-year span.

In lower-risk areas only about 1 percent of homeowners carry flood insurance. But FEMA wants these homeowners in the program as well. While the probability of flooding is low, 25 percent of all claims made under policies involve low-risk and moderate-risk communities, according to Mike Siemienas, a spokesman for Allstate Insurance.

Based on the collective inaction, these probabilities have yet to convince the public that flooding is not just something that happens to other people.

Confusing the perception of risk further may be the presence of community flood management projects.

Matt Kelsch, a meteorologist and flash flood expert with University Corporation for Atmospheric Research in Boulder, Colo., says that while flood control projects help reduce the occurrence and impact of small or medium flooding threats, they are not necessarily going to avert big events like a levee failure.

“In New Hampshire last year it was the road embankments that failed,” says Kelsch.  Often, he says, the ‘big’ events are caused by the failure of human-made structures that are part of the flood control solution.

It is those big events that one would most want to be insured against because damage would be extreme.

While flood insurance is a godsend for people whose homes wash away, it is less effective for more mundane flooding. That explains why it is fairly inexpensive. According to FEMA, the policies cost $400 a year on average. Homes in low-risk areas with no basement could qualify for discounted premiums averaging $233.  Basement coverage is slightly extra.

Flood insurance generally covers only mechanical and structural systems, including furnaces and water heaters. Coverage for contents can be added, although only freezers, washers and dryers are covered in basements. Personal belongings and furnishings aboveground can qualify for contents coverage.

While Kinerney talks of protection against floods caused by burst pipes and other non-natural flood causing agents, there is also the definition of ‘flood’ to contend with before a claim will be settled. Not all floods are floods. There may be two feet of water in the basement, but if there is no standing water outside or it does not impact two acres of land or at least the neighbor’s home as well, it may not be a flood.

Mortgage companies seem to drive most flood insurance decisions.  If the lender does not demand flood insurance — a decision based on FEMA’s flood-risk rating — then why would the homeowner take on the added expense? Cue the FEMA mantra: Anyone, everywhere — flash floods occur in all 50 states.

George Moloney, manager of Koenig & Strey Insurance Agency in Wilmette, Ill., writes a fair amount of flood insurance for his clients, though much of it through AIG, Chubb and Firemans Fund, since federal flood insurance coverage is limited to $250,000 for a single family home.

Even with some policies covering homes in the high-risk area along the Des Plaines River, he has had little claim activity. Mainly his clients, regardless of where they live, add the coverage not because they are concerned about their risk, but because for a few hundred dollars a year they just don’t have to think about it. 

It may not be the best reason, but when it comes to weighing the nuances of flood insurance and the risk any one property faces against what would actually be covered, it qualifies as the most compelling reason.