Flood and Other Limited Policies
Flood insurance
Flood is excluded from virtually all property insurance policies. The National Flood Insurance Program (NFIP) is a government-sponsored program created to make flood insurance available to property owners in qualified, flood-prone areas.
The program is administered by the Federal Emergency Management Agency (FEMA). Flood insurance policies are issued through a partnership between the federal government and private insurers. The goal is to make flood coverage available to owners of property in flood-prone locations.
Cities, towns, and counties typically participate by adopting and enforcing FEMA-approved floodplain management ordinances. Flood coverage is available for any eligible building or contents in a community that participates in the NFIP, whatever its flood zone: owners in low- and moderate-risk zones can buy it too. FEMA’s flood maps identify the high-risk Special Flood Hazard Areas, where lenders require flood insurance on federally backed mortgages. Coverage is not available in a community that does not participate or has been suspended.
A new flood policy, or an increase in coverage, generally takes effect after a 30-day waiting period. There is no waiting period when the coverage is bought in connection with making, increasing, extending or renewing a loan, and a one-day wait applies in the first 13 months after a map revision newly places the building in a high-risk area.
Producer training. Section 207 of the Flood Insurance Reform Act of 2004 directed FEMA to set minimum training and education requirements for insurance producers who sell NFIP flood policies. FEMA published them in 2005, and the states enforce them through producer licensing and continuing education.
There are two programs provided by the National Flood Insurance Program (NFIP):
Emergency program
This program goes into effect as soon as a community meets the land-use control requirements required by federal law. Rates may include legacy federal subsidies under the Emergency Program, and the following are the only limits offered:
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Building:
- 1-4 family dwellings - $35,000
- Other residential (5 or more units) - $100,000
- Non-residential - $100,000
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Contents (per unit):
- All residential - $10,000
- All non-residential - $100,000
Regular program
This program becomes effective once a flood insurance rate map is prepared. The map divides the community into specific zones to estimate the probability of flooding in each area, and the community agrees to adopt more stringent flood control and land-use measures. Rates are no longer subsidized, and the following limits are offered:
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Building:
- Single Family (1-4 family dwellings) - $250,000
- Other residential - $500,000
- Other Non-residential - $500,000
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Contents (per unit):
- All residential - $100,000
- Other non-residential - $500,000
The policy also covers the removal of debris. Property moved to protect it from a flood is covered at its new location for 45 consecutive days, and the policy pays up to $1,000 for the reasonable cost of moving it. Debris removal is covered, including debris deposited by flood, but it does not include trees, shrubs, or landscaping materials.
The insuring agreement of the flood policy provides coverage for direct physical loss by or from a flood. The policy definition of flood is:
"A general and temporary condition of partial or complete inundation of normally dry land area resulting from the overflow of inland or tidal waters or the unusual and rapid accumulation or runoff of surface waters from any source. "
The FEMA Standard Flood Insurance Policy (SFIP) defines flood as a general and temporary condition of partial or complete inundation of two or more acres of normally dry land, or of two or more properties (one of which is the insured’s), from overflow of inland or tidal waters, unusual and rapid accumulation or runoff of surface waters from any source, or mudflow. It also includes the collapse or subsidence of land along the shore of a lake or similar body of water from erosion by waves or currents exceeding anticipated cyclical levels.
The SFIP treats mudflow, a river of liquid, flowing mud carried by a current of water, as flood. It does not cover landslides or other earth movement, even when flooding causes them. Homeowners policies also exclude this type of loss.
The phrase “general condition” means the flood must affect the geographic area, not just the insured’s own property. The policy does not cover water damage that originates from the insured’s property.
In addition, the policy will not cover damage caused by:
- A broken or stopped-up sewer
- A faulty sump pump
- Earthquake
- Landslide
- Accumulation of water on an insured’s property due to the formation of the land
As with any property policy, flood insurance has a deductible. The deductible is applied separately to building coverage and contents coverage.
There are two minimum deductibles available for the NFIP policy:
- For a home, the minimum building deductible is $1,000 when building coverage is $100,000 or less, and $1,250 when it is more. Older (pre-FIRM) buildings that still receive a discounted rate have a higher minimum of $1,500 or $2,000.
- The minimum contents deductible is $1,000.
Higher deductibles, up to $10,000, may be selected to reduce premium.
The following are excluded from coverage:
- Trees, shrubs, plants and lawns
- Reduction in land value
- Fences
- Outdoor swimming pools
- Walks, driveways, and paved surfaces
- Underground structures (i.e., wells)
- Certain components below the Base Flood Elevation (BFE) in elevated buildings
- Properly anchored service equipment may be covered
- Money and securities
- Animals, birds, and fish (including livestock)
- Aircraft
- Automobiles
- Trailers
- Watercraft
Other property insurance forms
Mobile home insurance (MH)
Mobile homes may be insured with protection similar to a homeowners policy. This coverage is modified by several provisions that reflect the unique exposure (the mobile home).
To be eligible for mobile home coverage, the home must be designed for portability and year-round residential living. Under older guidelines, the minimum size requirement was at least 10 feet by 40 feet.
Under current requirements, the unit must qualify as a HUD-compliant manufactured home. This means it was built after June 15, 1976 and designed for residential occupancy. This requirement prevents small campers or travel trailers from being insured as a “home.”
The mobile home must be constructed on a permanent frame and originally manufactured with wheels. Units permanently attached to a foundation may be eligible for coverage only in certain situations, depending on the policy and insurer.
Coverage A protects the mobile home described in the declarations. Structures not attached to the mobile home are generally not covered. Coverage is also provided for personal property and additional living expenses. $500 of coverage is provided for removal when the mobile home is endangered by a covered peril.
A transportation endorsement is available. It covers damage caused by collision, upset, stranding, or sinking while the mobile home is being moved to a new location. Once the move begins, the policy covers these perils for up to 30 days while in transit.
Watercraft
Watercraft property coverage can be purchased to protect an insured’s boat or yacht against damage by covered perils. A homeowners policy provides only limited watercraft coverage, so boat owners often need broader protection for the larger exposure. Liability arising out of the ownership or operation of watercraft is generally excluded by homeowners policies.
Boat owner policies cover the following:
- Inboard or inboard/outboard boats of over 50 horsepower owned by or rented to an insured
- Any boat powered by an outboard motor(s) in excess of 25 horsepower
- Sailboat that is 26 feet in length or more which is owned by or rented to the insured
A Boat Owners Policy is a package policy that provides:
- Property insurance for the insured’s boat
- Liability protection if the insured is legally liable for bodily injury or property damage to others arising out of the boat’s operation, maintenance, or use
(For small crafts, liability may be added by endorsement to a homeowners policy.)
Property losses are settled on an ACV basis and are subject to a deductible. Coverage is generally provided on an all-risk basis. A sailboat longer than 26 feet without inboard power may be covered under this policy.
Earth movement (earthquake)
Coverage for earth movement may be added to some property insurance policies by endorsement. This endorsement typically modifies the earth movement exclusion found in most property forms.
Coverage applies to loss to insured property resulting from earthquake or volcanic eruption. It does not cover flood or tidal waves generated by these perils. Damage to land is also not covered.
Earthquake deductible. The earthquake endorsement replaces the policy’s regular deductible with a percentage deductible, shown in the endorsement and applied to the limit of insurance (the larger of Coverage A or Coverage C on a homeowners policy). The percentage is chosen when the endorsement is added, and the deductible is never less than a minimum dollar amount. All earthquake shocks within a 72-hour period count as one earthquake, so only one deductible applies to them.
Most property policies now provide coverage for volcanic eruption under the earth movement peril. In most personal lines policy forms, any volcanic eruptions that occur within a 72-hour period are treated as a single occurrence.
Inland marine insurance
Inland marine insurance was originally developed to protect goods being transported from place to place. As inland marine coverage evolved, the National Association of Insurance Commissioners (NAIC) proposed a “Nationwide Definition” for marine insurance. This definition recognized the following classes of property as eligible for marine insurance:
- Imports
- Exports
- Domestic shipments (railroads, ships, autos, barges)
- Instrumentalities of transportation and communication (bridges, tunnels, pipelines, power transmission lines, and radio and T.V. equipment)
To be eligible for an inland marine contract, a risk must include an element of transportation. The property must be:
- In transit,
- Held by a bailee,
- At a fixed location that is considered an important instrument of transportation, or
- Transportable property that is often at different locations
These all-risk forms cover shipments of goods by air, rail, or motor carrier. They may also cover the carrier’s legal liability for loss or damage to the merchandise.
Goods in transit may be covered in one of two ways, depending on whether a common carrier or the insured’s own trucks are used:
- If a common carrier is used:
- An annual transit policy may cover all shipments during a year.
- A trip transit policy may cover a single shipment.
- If the insured ships goods on its own trucks:
- A motor truck cargo policy is used.
A motor truck cargo policy functions similarly to an annual transit policy, but it is subject to:
- A coverage limit on any one truck in any one place, and
- A further coverage limit on any one disaster
Comprehensive personal liability (CPL)
A dwelling fire policy covers losses caused by fire, lightning, extended coverages, and several other perils. It does not cover an insured’s legal responsibility for bodily injury (BI) or property damage (PD) to others arising out of personal activities.
That liability exposure can be insured by purchasing a Comprehensive Personal Liability (CPL) policy. This type of personal liability coverage is included as Section II of a homeowners policy.
Under the CPL policy (as in homeowners Section II), the insureds include:
- The named insured in the declarations, and a spouse who lives in the same household
- Any family or relatives living in the household
- Any other person under age 21 who is in the care of any of the aforementioned insureds
According to a CPL policy, the insured location is:
- The residence premises
- Vacant land other than farmland owned by the insured
- Individual or family burial or cemetery plots
- Any premises the insured acquires during the policy period for use as a residence
- Any part of a premises not owned by any insured where any insured is temporarily residing
There are two sections of coverage that are identical to Coverage E and F in a homeowners policy.
The CPL policy has some additional coverages, including:
Supplementary Claim Expense
- Also known as supplementary payments, this coverage states that the insurer will pay, in addition to the limits of liability provided by the policy, all expenses incurred in the defense of any legal suit (even if groundless) plus any other legitimate and applicable legal expenses.
First Aid Expense
- The insurer will pay, in addition to the policy’s limits, expenses incurred for first aid performed related to any BI covered by the policy.
Loss Assessment
- The insurer will pay up to $1,000 for any assessment against an insured by a condominium or cooperative association. This limit may be increased for an additional premium.
Damage to the Property of Others
- This provides additional insurance up to $1,000 per occurrence, at replacement cost, if an insured causes damage to the property of others. This coverage pays smaller PD claims that would not typically require legal action (and payment from Coverage E, Personal Liability).
Exclusions
- No liability protection is provided to an insured for the following:
- Damage to property owned by the insured
- BI that is covered by Workers’ Compensation
- BI to any insured
- BI or PD arising out of business activities
- BI or PD arising out of the ownership, operation, or use of an aircraft auto or watercraft over certain HP/size limits
- Intentional injury or damage to others
Umbrella and Excess Liability
- Everyone is subject to catastrophic liability claims. Wealthy individuals may be targets of larger-than-normal lawsuits. Umbrella or excess liability policies can be used to address these potential losses.
- Excess Liability provides excess limits above the limits of applicable underlying coverage. It does not broaden coverage beyond what the underlying policy provides; it increases the limit only.
- An umbrella liability policy may be purchased for business or personal reasons. It provides excess limits and also broader protection than the primary policy.
- Insurers typically require specific minimum underlying liability limits before allowing an insured to purchase umbrella coverage.
Lesson summary
The National Flood Insurance Program (NFIP) provides subsidized flood insurance to property owners in flood-prone areas, administered by FEMA.
- Flood insurance policies are issued by the government and private insurers.
- Program purpose: Make flood coverage available in flood-prone locales.
- Two NFIP programs:
- Emergency Program: Subsidized rates, limited coverage.
- Regular Program: No subsidies, higher coverage limits.
Residential buildings are classified into 1-4 family dwellings and Other Residential (5+ units), with differing building-limit maximums.
The flood policy covers direct physical loss by or from flood, with specific definitions and exclusions:
- “Flood” definition includes inundation from various sources.
- Exclusions: Various water-related damages and losses.
- Deductibles apply to both building and contents coverage.
Other property insurance forms include:
- Mobile Home Insurance: Specific provisions, property, and liability protection.
- Watercraft Insurance: Protection beyond typical homeowners’ policies for boats and yachts.
- Earth Movement (Earthquake) Coverage: Added to property insurance policies for earthquake or volcanic eruption losses.
- Inland Marine Insurance: Protects goods being transported and includes specific property classes.
- Comprehensive Personal Liability (CPL): Covers legal responsibility for bodily injury and property damage arising from personal activities.
- Umbrella and Excess Liability: Provide broader protection with higher limits than primary policies, with specific requirements.