OVERVIEW OF THE NATIONAL FLOOD INSURANCE PROGRAM

(December 2023)

The massive financial resources needed to handle catastrophes such as floods are limited in the private sector. A single loss event may simultaneously affect hundreds or even thousands of homes and businesses. Further, the amount of damages suffered by each property owner is severe. Therefore, the federal government has primarily handled insuring flood damage; they are considered an insurer of last resort. The job was accepted in earnest in 1968 with the passage of the National Flood Insurance Act, which had a twofold purpose:

· To provide insurance coverage to certain persons whose property has been substantially damaged by flooding

· To encourage communities to practice building and land use methods that help mitigate (ideally eliminate) damage from flood

COVERAGE

This insurance covers direct physical loss to insured property by flood. It also covers the reasonable expenses for sandbags, construction materials and even the human labor in handling the materials used to minimize damage to flood-imperiled damage. The reimbursement for labor uses the prevailing federal minimum wage. The maximum amount payable is the minimum building deductible amount applicable.

The Standard Flood Insurance Policy is designed to cover one- to four-family residences and their contents from flood damage. The policy will also protect tenants’ personal property and residential condominium unit owners. In the latter instance, the policy can be used to insure a unit owner's individual interest in the structure and in the building's common elements (areas jointly owned by all unit owners).

Related Article: NFIP Standard Policy Coverage Analysis

The Residential Condominium Building Association Policy is available to insure the condominium association’s residential condominium building. A Flood Insurance Policy for General Property is available for non-residential structures and their contents, including commercial and manufacturing properties.

The NFIP Program also has a Preferred Risk Policy, available to one- to four-family residential buildings located in flood zones not designated as high hazard (non-SFHA). The Preferred Risk Policy is not available for condominiums.

WAITING PERIOD

The NFIP uses a 30-day waiting period to avoid instances of arranging for flood insurance only when disaster is imminent.

Example: Harlan’s home is in the center of Parchleyville, which has been a participant in the NFIP for more than a decade. The last two weeks, after heavy rains, the large creek near the town has been threatening to spill over its banks. Harlan decides it’s a good time to visit his insurance agent and apply for flood insurance. The agent happily takes care of Harlan’s request but tells him that his policy won’t take affect for a month.

However, there is no waiting period when either new coverage is sought during the initial 30 days of a community entering the NFIP or when a new owner applies and pays for coverage before the closing of a mortgage loan.

EXCLUSIONS

The policy excludes losses caused by:

Theft, loss of profits, fire, windstorm, wind, explosion, earthquake, land sinkage, land subsidence, landslide, land movement resulting from subsurface water accumulation, gradual erosion, or any other earth movement, except such mudslides or erosion as are covered under the peril of flood
Rain, snow, sleet, hail, or water spray; or by freezing, thawing, the pressure or weight of ice or water, sewer backup or seepage of water unless the insured property has first been damaged by flood
Water, moisture, or mudslide damage created by a condition confined to the insured building or that is within the insured's control
A flood which is already in progress as of 12:01 A.M. of the first day of the policy term
A flood which is confined to the insured premises unless the flood is displaced over two acres
Modification to the insured property, which materially increases the risk of flooding
Intentional actions by the insured or a member of the household
Power, heating, or cooling failure (unless the system was directly damaged by a flood)
Flooding of property leased from the federal government when the flooding is caused by the federal government

DEBRIS REMOVAL COVERAGE

The policy covers expenses for removing debris from or on the covered building or contents. But this coverage is provided as part of the policy’s insurance limits and is NOT additional coverage.

PROPERTY NOT COVERED

A Standard Flood Insurance Policy is designed to provide basic protection to contents. Therefore, similar to other types of policies that protect buildings and property, it has a laundry list of items that do not qualify for coverage. Essentially, it does not cover items that are not feasible for coverage under the program, nor does it act as a source of possible redundant protection already provided by standard commercial property and residential property forms.

National Flood Insurance Program General Property Policy Coverage Analysis

National Flood Insurance Program Standard (Dwelling Form) Policy Coverage Analysis

DEDUCTIBLES

In prior years, under the regular program, there was a minimum policy deductible of $500 for each loss to a building and contents. Under the NFIP Emergency Program, there was a minimum deductible of $750 for each loss to a building and its contents.

Now, a loss deductible applies separately to each building and personal property loss, and the minimum deductible depends on the Program Type, Rating Zone, and Coverage Limit.

For the Emergency Program, the minimum deductible is $1,500 for coverage of $100,000 or less and $2,000 for coverage over $100,000.

The Regular Program has several rating points that must be considered to apply a minimum deductible. In general, the minimum deductible for the Regular Program is $1,000 for coverage of $100,000 or less and $1,250 for coverage over $100,000.

MORTGAGEE INTEREST

If the flood policy is canceled for non-payment of premium, coverage will stay in force for 30 days from the Final Notice mailing date to protect the insurable interest of the mortgagee (or trustee). The mortgagee (or trustee) also has the right to submit a proof of loss when it is notified that the insured has failed to do so, but it must do so within 60 days of receiving the notice. The other applicable policy obligations and provisions then apply to the mortgagee.

OTHER INSURANCE

The company is not liable for a greater proportion of any loss, less the amount of deductible, from the peril of flood other than the amount of insurance the policy bears to the whole amount of (primary) flood insurance covering the property regardless of whether the insurance is collectible. If the total amount of primary flood insurance on a covered property exceeds what is allowed under the National Flood Insurance Act, the company’s proportion of coverage is based on the TOTAL amount of insurance allowed. In certain instances, the insured may request a partial refund of coverage. Other insurance considerations may become more of an issue with the developing private flood insurance market.

IN EVENT OF LOSS

Payment of any loss under a flood Insurance policy does not reduce the insurance applicable to another separate loss during the policy term. Losses from a continuous or protracted occurrence are considered to be a single occurrence. An insured’s responsibilities after a loss (reporting a loss, proof of loss, cooperating with insurer, etc.) are quite similar to provisions found in other standard commercial and residential property policies.

An insured under a flood policy can’t file a legal action against the company until he or she has complied with every applicable policy provision. If a suit is filed, it has to be done within 12 months of the day after being notified that all or part of a claim has been rejected.

National Flood Insurance Program General Property Policy Coverage Analysis

National Flood Insurance Program Standard (Dwelling Form) Policy Coverage Analysis

CANCELLATION PROVISIONS

A flood insurance policy may be canceled at any time at the request of the insured. However, the premium paid for the remaining policy term is fully earned if the insured retains an interest in the covered property. Considering the premium to be fully earned removes an incentive for persons to just carry coverage during parts of the year that are storm or flood prone. The NFIP provides a form for insurers that list valid, company-requested cancellations.

OTHER ASPECTS OF THE NFIP

WRITE YOUR OWN (WYO)

The Write Your Own (WYO) Program is a cooperative effort between the insurance industry and the Federal Insurance Administration. WYO allows participating insurance companies to write and service the Standard Flood Insurance Policy in their own names but is still subject to all of the NFIP’s rules and regulations. Participants receive an expense allowance for policies written and claims processed while the Federal government retains responsibility for underwriting losses. An insurance producer has the option of placing flood insurance directly with the NFIP Servicing Agent or with one or more WYO companies. Each WYO Company determines its own procedures for developing and compensating its agents.

COMMUNITY RATING SYSTEM

The Community Rating System (CRS) was created by the Flood Insurance Administration (FIA) to provide insurance rate credits for voluntary flood mitigation projects that exceed the NFIP's minimum requirements for floodplain management. Under the CRS program, qualifying projects can include future flood reduction measures for existing structures, construction of new buildings, and campaigns to increase community awareness about flood insurance.

MORTGAGE PORTFOLIO PROTECTION PROGRAM

The Mortgage Portfolio Protection Program helps mortgage lenders review their loan portfolios and identify properties in Special Flood Hazard Areas (SFHA). The homeowner is notified and then required to buy a flood insurance policy. If the owner buys insurance, the lender is permitted to place flood insurance on the property. Force placing flood coverage is to be done as a last resort.

Note: A mortgagor must disclose the need for insurance to the borrower, provide information regarding the necessary amount of insurance, and provide information on the applicable property’s flood zone.

Related Article: NFIP Flood Zone Explanations

SEVERE REPETITIVE LOSS STRUCTURES

Severe Repetitive Loss Structures are properties (located nationwide) that the NFIP has identified as having suffered substantial, repeated flood losses. The NFIP created this category due to the elevated level of loss represented by a relatively small group of properties. These properties are now segregated and monitored after placement in a special facility. The program has had some effect on this group of out-sized flood exposures.

The term Severe was added to the Repetitive loss structures.

Related Article: Repetitive Loss Properties