Protecting our island from flood

IN 1972, our agency was the first in Galveston County to write a standard flood insurance policy through the National Flood Insurance Program (NFIP). We were also the first agency in the United States to write a flood policy through a private carrier when the "Write-Your-Own" carrier program began in 1983.

It's not difficult to understand why. Galveston Island is a barrier island, located adjacent to the Gulf of Mexico. The Galveston Hurricane of 1900, the subject of the recent best-selling book "Isaac's Storm," was the deadliest natural disaster in United States history, killing nearly 8,000 people and destroying approximately 3,500 homes and businesses. About 80% of the island is labeled as being at high risk of flood. All residents of Galveston, not just our agency, are well aware of the devastating potential of flooding and the need to protect against it.

Flood insurance, of course, can be important for many risks, not just those on a barrier island: 30% of all flood losses occur in areas not considered high-risk for the hazard. As I'll explain in this article, the National Flood Insurance Program can help all agencies understand the risk of flood, educate clients and prospects about the risk and make affordable flood protection a valuable part of the coverage you offer.

The NFIP

The NFIP was created by a 1968 act of Congress. The goal of the program is to encourage communities to engage in floodplain management and to provide affordable flood insurance for private property owners. The program is administered by the Mitigation Division of the Federal Emergency Management Agency (FEMA). When the program was created, all policies were issued and handled by the NFIP. In 1983, it created the "Write-Your-Own" (WYO) program, giving private carriers the ability to issue NFIP policies. FEMA remains responsible for paying losses, and private carriers issuing policies earn a fee for each policy they write.

Participation in the program is on a community level. A property owner can purchase a standard flood policy only if the property is within a member community. To join the program, community must agree to certain floodplain management measures, such as enacting and enforcing construction ordinances related to base elevation of new structures, and other flood mitigation efforts. The NFIP conducts land surveys of member communities and creates flood insurance rate maps (FIRMs) used to classify different flood "zones" according to risk of flooding. Within a particular flood zone, available insurance limits and premium rates are consistent nationwide.

Marketing flood coverage

We're a 111-year-old insurance agency on a barrier island. Thus our marketing efforts don't really need to be directed at convincing most prospects of the need for flood insurance. Instead we focus on reinforcing our reputation as experts in flood insurance and maintaining ties with other professionals who have access to prospects.

We've had some response from our ad in the local phone directory and from our Web site. But we don't have to provide clients with too much other information about the risk of flood itself. When clients or prospects want to learn more about flooding, we can refer them to the FEMA and NFIP Web sites, which have an abundance of material. Agencies can obtain educational materials and support from the NFIP or a private WYO carrier.

Our participation in local insurance associations and our support of local businesses are an important part of our efforts to maintain visibility in the community. We're members of the Galveston Area Chamber of Commerce, and I serve on the Texas FAIR Plan governing committee and on the boards of directors for the Independent Insurance Agents of Texas and the Texas Windstorm Insurance Association. (Like flooding, windstorm is a risk that is especially high in our area.)

We also educate professionals in other fields about flood insurance. We hold seminars on flood and windstorm insurance for bankers and real-estate agents, helping them remember our name when they're serving their own clients. We provide contractors with flood coverage as part of builders risk policies. Satisfying a construction-industry client can lead to business from other contractors and those who buy the homes and buildings they build.

An important part of our "marketing" is done by the NFIP itself. Federal law requires flood insurance for any federally backed loan if a property is within a high-risk flood zone. If you purchase a house and obtain a mortgage loan from a private bank or other lender guaranteed by the FDIC or FSLIC, for instance, you must buy flood insurance. In many instances, we thus don't have to address the question of "Do I really need flood insurance?"

This rule doesn't affect everyone, of course. Some affluent clients purchase homes without loans. Others may pay off their loans, eliminating the flood insurance requirement. If these clients decline to purchase flood coverage, we require them to sign documentation indicating that we offered it. We also send them regular reminders of our recommendation that they purchase a policy.

Covering the flood

Standard flood policies are quite basic in terms of their covered causes of loss, available limits, and what property is and isn't covered. It's important for both agents and their clients to understand the various limitations so that clients don't incorrectly believe they have more coverage than they do, and so agents can work with their clients to find other desired coverage elsewhere.

A loss is covered only if it is caused by flooding, as defined in the policy: "...a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area, or of two or more properties, at least one of which is your property, from (a) overflow of inland or tidal waters, (b) unusual and rapid accumulation or runoff of surface waters from any source; (c) mudflow." A sewer backup resulting in damage caused by several inches of standing water is not covered.

For residential properties, the policy has a $250,000 limit for the building and $100,000 limit for contents. The limits for a commercial property are $500,000 for the building and $500,000 for contents. In our area, many clients have homes worth $750,000 or more. If they want coverage for the full value of their homes, we have to seek coverage from an excess market. We have had a great experience with our WYO carrier, First Community Insurance Co., through which we write the standard policies; however, we have found that companies in the excess market tend to come and go, making it important for us to select them carefully.

Replacement-cost coverage is available for primary homes. For secondary homes, losses are paid only on an ACV basis. This is another important consideration for agents who, like us, have a number of affluent clients purchasing vacation homes in coastal areas. We must obtain coverage from an E&S market to get replacement-cost coverage for these clients. In any case, a fairly extensive list of items is excluded from coverage under the standard flood insurance policy. The list includes sidewalks, patios, lawns, shrubs and any property located outside the perimeter of the insured building; any open building (such as a boathouse) or any structure located entirely in, on or over water or seaward at the mean high tide. Accounts, bills, coins, currency and deeds are not covered, nor are such structural elements as retaining walls or bulkheads. The standard flood policy does not provide coverage for either loss of use or loss of business income.

Even in an insured building, personal property is not covered if it is located in the structure's basement or below the foundation of the building. An exception is made for property used to service or maintain the building. As an example, a hot water heater in an insured home's basement would be covered in the event of a flood loss. Improvements to the basement or enclosure, such as paneling and carpeting, as well as furniture in the basement or enclosure, would not be covered.

Applying for coverage

In addition to the type of information needed for any property insurance application, NFIP applications also require the flood-zone rating of the property and certification of the property's base elevation if it lies within a high-risk flood zone.

By definition, a property eligible for a standard flood policy lies within a community that participates in the NFIP. This means that FEMA has created a flood-zone map of the area and classified the land according to specific flood-zone ratings. Zones rated "A" or "V" are 100-year flood zones and are considered special flood hazard areas. The term "100-year flood" can be misleading. It does not mean that a flood should occur once every 100 years. Rather, it means that the chance of flood is 1% or greater in any given year-which means floods could happen several years in a row. Zones B, C and X are outside a special flood hazard area. Rates are thus higher for properties in zones A and V, and it is these properties for which flood insurance is required when federally backed loans are involved.

An agency can determine the flood zone status of a property in several similar ways. Flood zone maps are easy to obtain and can be read accurately with a reasonable amount of training. Many WYO carriers also provide flood zone determination for their agencies. Many of our clients' properties lie either in an A or V zone. Homes along the bay side of the island lie mostly within an A zone, where the flooding threat comes mainly from rising waters. On the Gulf side, many properties are in a V zone, in which the flooding threat also includes the potential of tidal surge.

The required base elevation certificate, which is provided by a professional surveyor, certifies that the property meets the requirements of local ordinances. (Those requirements are based on the NFIP's rate maps.) Coverage is available for properties with lower base elevations, but it will cost more. Properties within special flood hazard areas must also meet specific construction requirements. A building may be required to be built on pilings, for instance, with no dirt or other material underneath the structure, so that rising waters will do less damage to the structure's integrity.

If flood insurance is bought at the time of closing on the purchase of a building, coverage takes effect immediately. In other cases, a 30-day waiting period applies. This guards against the possibility that some people will refuse to purchase the coverage until they know a huge storm is about to hit. Our peak flood season is usually May through November, and we see a slight increase in applications a bit before the season begins. But we don't have many clients or prospects calling us right before a storm, seeking coverage.

FEMA, the NFIP and our WYO carrier have all come to our office to provide training to our employees, and almost everyone in our office has become an expert on flood insurance. This helps us write and submit the policies more efficiently. If everything about a client is "in the box"-the property is in a B, C, X, A or V zone, no excess amounts are needed, etc.-an agent can quote a rate to the client. "Out of the box" applications are referred to as "submit for rate" policies. Because of special concerns about these applications-they're for properties in a special flood zone, they require high limits, they have a large enclosure below (if elevated), there's a problem with the base elevation, etc.-most agencies have to let the WYO carrier determine a rate. We save time for our clients and work for our carrier because we're able to rate these "out-of-the-box" applications ourselves, which many agencies can't do.

Claims and service

Although the flood policy states that "In case of a flood loss to insured property, you must: Give prompt written notice to us (insurance company)," there is no specific time limit for filing a claim. This is helpful to many of our clients, who use their homes in Galveston as second homes. Not only might they not be here when a storm hits, but they also might not be able to get here for quite awhile. Sometimes, we get claims that are filed many weeks after flooding has occurred. Our insureds can contact us, or in the event of a catastrophe, the carrier may request that insureds contact them directly through a toll-free number.

Insureds are required to take reasonable steps to mitigate the effect of the flood and prevent further damage. Obviously, a home that has been bottled up for four weeks because the owner was out of town will have more damage than one that has been cleaned up and allowed to dry out right away. In most instances, it won't be held against a policyholder if he or she is out of town when a flood comes and can't get to the house right away. However, "coverage is excluded for water, moisture, mildew or mold damage caused by the insured's failure to inspect and maintain the property after the flood waters recede." Many of our clients will thus ask someone they know in the area to take some basic steps after a flood.

Other than the education we offer our clients and other professionals, processing claims is the most important service we provide. When our clients have claims, we pass their information to our carrier, who assigns an adjuster and handles it from there.

If a catastrophe occurs, we will send our people out with the adjusters. We do this to help the carrier, to touch base with our customers and to ensure the coverage we've been providing is sufficient. Having our only office on the island itself has helped us provide better service and maintain our reputation. After some flood events, access to the island (or parts of it) has been restricted, and we've been one of the few agencies with people here, ready to help.

Ride the wave

We might lose many clients if we didn't offer flood insurance-even if we provided coverage for all their other needs. Because all our producers and CSRs have expertise in the coverage, we've enhanced our agency's reputation for understanding the needs of clients in our area. Regardless of whether your agency is in an area known for flooding, understanding this risk and knowing how to work with the NFIP and WYO carriers can enhance your agency's reputation, add to your bottom line and ensure that your clients are protected against what could otherwise be a catastrophic loss.