What is flood insurance and why is it necessary?

Over the recent weekend, Tropical Storm Hilary made a significant impact on the Western US, marking the first tropical storm to traverse California in a quarter century and the inaugural tropical storm for Nevada. Various regions in Southern California shattered rainfall records, with Downtown Los Angeles experiencing its rainiest summer day on record. The state’s roadways are now swamped by water, mud, and debris.

Despite the familiarity of California’s approximately 39 million inhabitants with wildfires and earthquakes, the adoption of flood insurance remains limited. As of July 31, only around 194,000 active flood insurance policies were held across the state, according to data from the Federal Emergency Management Service (FEMA). 

The city of Palm Springs, with a population of about 45,000, encountered nearly a year’s worth of rainfall within just a 24-hour span. Remarkably, there are a mere 167 active flood insurance policies in place in Palm Springs, as reported by FEMA.

Instances of life-threatening flash floods in areas unaccustomed to flooding, coupled with projections of heightened extreme weather events, emphasize the significance of flood insurance. Despite its potential to safeguard substantial assets for many households, flood insurance remains relatively poorly comprehended and frequently overlooked. Here’s a comprehensive overview.

Understanding Flood Insurance:

Flood insurance constitutes a form of coverage designed to protect renters, homeowners, and business proprietors against the damage stemming from floods. These policies generally stand apart from conventional homeowners insurance, as they encompass potential harm to the structural integrity of buildings and the loss of possessions therein. For renters, flood insurance exclusively pertains to the contents of their residences.

Within the United States, the Federal Emergency Management Agency (FEMA) has traditionally administered all flood insurance plans through the National Flood Insurance Program (NFIP). This implies that even insurance policies offered by companies like GEICO are ultimately backed by the federal government. 

David Maurstad, Senior Executive of the National Flood Insurance Program, emphasized that “flooding is the most common disaster across America,” and he highlighted that insured survivors tend to exhibit greater resilience and a swifter recovery following a catastrophe.

Is FEMA Flood Insurance Adequate?

Under FEMA’s policies, coverage for single-family homes is subject to a maximum limit of $250,000 for structural damage and $100,000 for contents. For businesses, the highest possible coverage reaches $500,000 per entity. It is worth noting that if a home is rendered beyond repair by flooding, these capped amounts might not suffice for rebuilding. In such cases, consideration of private flood insurance alternatives becomes crucial. In recent years, these private providers have carved out a niche in the flood insurance market by offering more extensive coverage and higher coverage limits compared to federal plans.

Eligibility for Flood Insurance:

Virtually every property owner across the US is eligible for FEMA flood insurance; however, individuals dwelling in higher-risk zones may be mandated to obtain a policy. For instance, substantial portions of Miami are categorized as Special Flood Hazard Areas, necessitating flood insurance for property owners with federally supported mortgages. Nonetheless, various residents residing in flood-prone or moderately risky locales might decide against acquiring flood insurance or might allow their existing policies to lapse. Florida, Louisiana, and Texas together account for 40% of all flood insurance policies in the nation, according to the Insurance Information Institute.

The Need for Comprehensive Coverage:

While coastal states frequently capture attention due to prominent hurricanes, Laura Lightbody, Director of Energy Modernization and Flood-Prepared Communities at the Pew Charitable Trusts, underscores that inland flooding is just as prevalent as its coastal counterpart. She cited data indicating that since the onset of 2022, six of the top ten states experiencing the most flood-related disasters were inland states.

Why Flood Insurance Is Distinct from Homeowners Policies:

Typically, homeowners insurance covers perils such as wind, fire, and theft, but it excludes floods and earthquakes. According to Michael Barry, spokesperson for the Insurance Information Institute, these latter risks were perceived as infrequent and potentially leading to extensive losses. Consequently, the insurance industry has historically treated them as separate policies. This exclusionary approach can be traced back to the 1968 National Flood Insurance Act, which led to the establishment of the NFIP. At the time, private insurers struggled to accurately price policies based on risk, prompting the federal government to intervene and subsidize flood insurance policies. This enabled FEMA to offer policies at rates lower than those private companies would have charged.

Cost Considerations:

Similar to other insurance types, flood insurance premiums escalate in accordance with perceived risk. For example, in Miami, flood insurance costs can at times rival those of homeowners insurance. Nonetheless, policyholders with coverage can potentially receive payouts amounting to tens of thousands of dollars.

Flood Insurance Decision:

FEMA highlights that a mere inch of floodwater could result in damage valued up to $25,000. The agency provides a searchable map database designating communities as high- or low-risk areas. According to FEMA, a high-risk area is one with a minimum 25% chance of flooding during a 30-year mortgage duration. Yet, FEMA emphasizes that flooding can occur in any location and for various reasons, including nearby construction and inadequate sewer maintenance. Laura Lightbody emphasizes that FEMA’s maps offer a snapshot of risk and are not predictive. She further adds that climate change, population growth, and urban development could have heightened risk levels over the past decade, leading to flooding in areas with increased construction and reduced green spaces to absorb excess water.