Many homeowners stricken by Hurricane Katrina in New Orleans were very unhappy when they made a claim on their National Flood Insurance Policy (NFIP) and discovered that the limitation of coverage of $250,000 on the building was insufficient to cover the cost of repair to their property. Those homeowners needed an excess flood insurance policy to provide additional coverage over the amounts offered in the government program.
In general, the number of people who buy flood coverage is below the number of who should carry it. Last year's Midwest floods damaged many hundreds of properties. Sadly, government estimates revealed that only 17 percent of the affected structures had NFIP coverage or any coverage at all for that matter.
Every insured needs to be advised that if their property is in a designated flood zone, the property is eligible for the following NFIP limits:
- Dwelling building: $250,000
- Personal property: $100,000
- Commercial building: 500,000
- Business personal property: $500,000
Obviously, there are many homeowners and businesses in flood-prone areas that have values far in excess of the national program, which is based upon flood plain zones developed by the Army Corps of Engineers.
An excess flood policy is the answer to address the needs for higher limits. A good excess policy will provide combined limits up to $15 million. There are many insurers, including Lloyd's, which offer this product through wholesalers and will write excess over the federal program.
The federal flood coverage is offered in those zones where the Army Corps of Engineers has engineered levees and other flood mitigation measures. These projects make properties located in the protected areas much better flood risks, which enables flood coverage to be written at very reasonable cost. It also reflects in similar savings should excess flood coverage be purchased. In addition, because the flood mitigation measures have been effective in the past, larger amounts of coverage are available for purchase in the market place.
While the U.S. Army engineers the building of levees and similar projects, they do not build, maintain or finance them. In fact, the Corps recently revealed that a large number of levees need maintenance, and many are areas of concern and should be repaired. This development should concern property owners located in the affected areas as the availability of federal flood coverage is directly linked to the affected levees.
It's important to note that some areas of the country have flood exposures that are not eligible for NFIP because exposures to the "100-year flood" possibility are not mitigated. In many cases, insurers can offer specific flood coverage for these risks if provided with sufficient underwriting detail.
In some areas of the country, risks are exposed to both flood and earthquake simultaneously– the area around St. Louis is an example. A difference in conditions (DIC) policy is the ideal solution in these instances.
Additionally, many commercial risks buy "flood and other perils coverage," such as earthquake, purely as "sleep" insurance. In most cases, this coverage is provided by a DIC policy, which completes the full all-risk coverage on a risk by covering the gaps that are left uncovered by a commercial property policy.
As agents, you may run across insureds who say, "I don't need flood insurance because I live on a hill." These insureds should not be so complacent. For instance, there was a school building that was located on a hill. During a season of heavy rains, a flash flood developed from the top of the hill, causing more than $1 million in damage. The insureds bought a DIC because they were aware of their earthquake exposure. Little did they know that their agent had taken an extra step and provided the best coverage he could, and the damage was covered.
At some point in the future, NFIP may no longer be available in some areas, which would be financially perilous. So, whether it is excess flood, primary flood or DIC, flood coverage is essential for all risks, wherever they are located.
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