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Who Needs To Purchase Flood Insurance?

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September 8, 2017

As Americans were overwhelmed by the extensive damage caused by Hurricane Harvey, many people thought seriously about flood insurance for the first time.

Flood insurance is required if you live in an area designated as a potential flood zone by the Federal Emergency Management Agency (FEMA). However, some 20-25% of flood claims come from moderate and low risk areas – not to mention the impact on uninsured people who are affected by floods. For example, some areas of Houston, TX, hit by Hurricane Harvey in 2017 were outside FEMA’s 100-year and 500-year floodplains – areas that would get flooded by the volume of rainfall that has a 1% or 0.2% chance, respectively, of falling there in any given year. In fact, it is estimated that 70% of flood damage caused by Harvey won’t be covered by flood insurance. How do you determine your risk of flooding so you can make a sound decision on whether or not to buy?

The first place to check is the FEMA maps. FEMA maintains maps labeling your risk by zones, either the FIRM (Flood Insurance Rate Map) or the (FHBM) Flood Hazard Boundary map. These maps are available on the FEMA website, and at your local planning and zoning office or similar agency.

Elevation and nearby geographic features determine your baseline risk of flooding. Areas designated as a Special Flood Hazard Area (SHFA), commonly known as the 100-year flood plain, are determined to have a 1% chance of being flooded in any year. The BFE (Base Flood Elevation) is the elevation in your area that defines the 100-year flood plain, and is used as the baseline for policy assessment.

Since any home in the SFHA has a 26% statistical chance of being flooded during a standard 30-year mortgage, flood insurance is required. There is a similar high-risk designation and requirement for coastal areas subject to hurricanes and storm surges (Zone A for SHFA, Zone V for coastal), with sub-designations based on other factors.

Moderate and minimal risk areas are labeled Zone B, C, or X. They range from areas with a 0.2% chance of being flooded in any year (5% over a 30-year mortgage) to areas that could be flooded by concentrated rainfall and drainage problems to areas where the flood depth would be less than 1 foot.
Areas labeled Zone D have not been studied.

If you are in moderate or minimal risk areas, you may want to buy flood insurance depending on these factors:

  • Change in Designation – Flood risks change over time as local drainage changes, due to developments, erosion, and other issues. FIRMs are occasionally updated, and if your designation changes to high-risk, you may suddenly be required to carry flood insurance. The Flood Insurance Reform Act of 2012 is forcing FEMA to more accurately assess flood risks and avoid exceptions. There is currently a battle in Congress on delaying portions of this, so it is wise to check your current designation.
  • Assessment of Flood Risks – Just as FEMA does on the large scale, you should assess your risks on the smaller scale. FEMA may not have reassessed your area in many years and there may have been significant changes.

    Questions to consider: Is there less area for natural drainage than before? Are storm drains in your area prone to clogging, and if so, where do they back up? Does water drain toward any part of your house, and how is it redirected? If you aren’t sure how to assess your risks, have a professional surveyor review your property and discuss the potential flooding issues.

  • Coverage concerns – Flood damage is not covered by homeowners insurance, and flood insurance has limitations (for example, basements, external features, and certain possessions have limited or no coverage depending on the policy). Check with your insurance agent about the costs and coverage in your area, and balance that against the repair value of your home and any replacement cost for covered items – for reference, a crude estimate for an average flood claim is $30,000. Many renters should also consider purchasing flood insurance, as renters’ insurance does not usually cover flood damage.

Note: While flood insurance can’t be bundled into a homeowner’s policy and must be sold separately and backed by the NFIP (National Flood Insurance Program), it may be purchased through local insurance agents. Consequently, your local agent may be a source of valuable information and guidance on this subject.

While FEMA assesses the larger-scale risks, only you can assess your specific risks and determine what is best for you. You may decide that flood insurance is worth the peace of mind, as well as the protection of your property and valuables. Fortunately, since insurance is risk-based, you may find that a policy in a moderate to minimal risk area is not unduly expensive. One last word of caution: Don’t wait until the weatherman predicts historic rainfall – there is a 30-day period before the insurance takes effect.

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