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.

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 (the residential building limits are higher in Alaska, Hawaii, Guam and the U.S. Virgin Islands):

• Building:

  • 1-4 family dwellings - $35,000
  • Other residential (5 or more units) - $100,000
  • Non-residential - $100,000

• 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. New construction pays full-risk rates, older (pre-FIRM) buildings may still receive a discounted rate, and the following limits are offered:

• Building:

  • Single Family (1-4 family dwellings) - $250,000
  • Other residential - $500,000
  • Other Non-residential - $500,000

• 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 pays the expense to remove non-owned debris that is on or in insured property, and debris of insured property anywhere. Insured property means the insured building and insured personal property. Land, lawns, trees, shrubs and plants are not insured property, so the policy does not pay to clear other debris, such as fallen trees or material the flood carried in, from a yard or driveway.

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 water or sewer line, drain or pump, or another condition within the insured’s control
• Water that backs up through sewers or drains, or overflows from a sump or sump pump, unless there is a flood in the area and the flood is the proximate cause of the backup or overflow
• 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
• Swimming pools, and hot tubs and spas that are not bathroom fixtures, with their equipment, wherever located
• Walks, driveways, and paved surfaces
• Underground structures and equipment (e.g., wells, septic tanks and septic systems)
• Most property below the lowest elevated floor of an elevated post-FIRM building in certain high-risk flood zones, or in a basement in any zone (listed items, such as furnaces, water heaters and central air conditioners, are covered if installed in their functioning locations and, if necessary for operation, connected to a power source)
• Money and securities
• Animals, birds, and fish (including livestock)
• Aircraft
• Automobiles
• Recreational vehicles, other than a travel trailer without wheels that is affixed to a permanent foundation
• Watercraft

Flood Insurance Education (National Flood Insurance Program (NFIP))

A producer who sells flood insurance through the NFIP must meet federal training requirements. 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.

Other property insurance forms

Mobile home policy (insuring agreement)

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).

The insuring agreement of a mobile home policy is the insurer’s basic promise. In return for the premium and the insured’s compliance with the policy provisions, the insurer agrees to pay for direct physical loss to the mobile home and the other covered property caused by a peril the policy insures against. Like a homeowners policy, it typically also provides personal liability and medical payments coverage for the insured’s household.

To be eligible for mobile home coverage, the home must be designed for portability and year-round residential living.

A manufactured home is built on a permanent chassis to be used as a dwelling and meets the federal construction and safety standards that HUD has applied to homes built on or after June 15, 1976. Self-propelled recreational vehicles are not manufactured homes.

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. Other structures on the residence premises are covered under Coverage B, with a limit of 10% of the Coverage A limit or $2,000, whichever is greater; using this coverage does not reduce the Coverage A limit. 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. Coverage for these perils runs for 30 days from the effective date shown in the endorsement.

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 larger watercraft is excluded by homeowners policies.

The personal liability coverage of a homeowners policy does not apply to the following watercraft, so their owners need a watercraft endorsement or a separate boat policy:

• An inboard or inboard-outdrive boat owned by an insured, whatever its horsepower, or one of more than 50 horsepower rented to an insured
• A boat with outboard motors of more than 25 horsepower in total that an insured owns, unless the insured acquired the motors during the policy period, declared them when the policy began or reported them to the insurer in writing within 45 days of acquiring them
• A sailboat 26 feet in length or more which is owned by or rented to the insured

Liability for any of these craft is covered while the craft is stored.

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

(A homeowners policy already covers liability for small craft, such as an owned boat with outboard motors of 25 horsepower or less in total or a sailboat under 26 feet. An owned boat with an inboard or inboard-outdrive engine, or a larger boat, needs a watercraft endorsement to the homeowners policy or a boat 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 26 feet or longer without inboard power may be covered under this policy.

Earthquake insurance (insuring agreement)

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.

The insuring agreement of the earthquake endorsement is short. For an additional premium, the insurer covers direct physical loss to the insured property caused by earthquake, including land shock waves or tremors before, during or after a volcanic eruption. It does not increase the policy’s limits. It does not cover flood or tidal waves generated by these perils. Damage to land is also not covered.

Volcanic eruption itself is a separate covered peril in most property policies, apart from the earth movement exclusion. Only the land shock waves and tremors of an eruption count as earth movement. In most personal lines policy forms, any volcanic eruptions that occur within a 72-hour period are treated as a single occurrence.

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.

For example, a home is insured for $300,000 under Coverage A and $150,000 under Coverage C, and the endorsement shows a 10% deductible. The deductible is 10% of $300,000, the larger limit, or $30,000. An earthquake loss of $50,000 to the dwelling and its contents is paid at $20,000. The deductible does not apply to Coverage D (loss of use).

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 six 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)
• Personal property floater risks
• Commercial property floater risks

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 a resident of the household and is in the care of any of the aforementioned insureds
• A full-time student who lived in the household before moving out to attend school, if under age 24 and a relative, or under age 21 and in the care of the named insured or a resident relative

According to a CPL policy, the insured location is:

1. The residence premises
2. Other premises the named insured uses as a residence that are shown in the declarations, and any premises the named insured acquires during the policy period for use as a residence
3. Any premises used in connection with the premises in items 1 and 2
4. Any part of a premises not owned by any insured where any insured is temporarily residing
5. Vacant land other than farmland owned by or rented to an insured
6. Land owned by or rented to an insured on which a one- to four-family dwelling is being built as a residence for an insured
7. Individual or family burial or cemetery plots or burial vaults of an insured
8. Any part of a premises occasionally rented to an insured for other than business use

There are two sections of coverage that are identical to Coverage E and F in a homeowners policy. In the personal liability form they are lettered Coverage L (personal liability) and Coverage M (medical payments to others), which are covered in Dwelling Policies (DP).

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.

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 the personal liability coverage).

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.

Sidenote

Know this...

Umbrella policies are characterized by a deductible, unlike most forms of liability insurance.

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: Full-risk rates for new construction, 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.
• Earthquake insurance: Added to property insurance policies by endorsement for earthquake losses, including the shock waves and tremors of a volcanic eruption, with a percentage deductible.
• 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.

Chapter vocabulary

Definitions

Aircraft Coverage

Coverage for aircraft (hull) and their contents; aircraft owners’ and aircraft manufacturers liability to passengers, airports and other third parties.

Assigned Risk Plan

A governmental pool established to write business declined by carriers in the standard insurance market.

Boat owners/Personal Watercraft

Covers damage to pleasure boats, motors, trailers, boating equipment and personal watercraft as well as bodily injury and property damage liability to others.

Comprehensive Personal Liability

Comprehensive liability coverage for exposures arising out of the residence premises and activities of individuals and family members. (Non-business liability exposure protection for individuals.)

Earthquake

Property coverages for losses resulting from a sudden trembling or shaking of the earth, including that caused by a volcanic eruption. Excluded are flood and tidal wave caused by the earthquake. Fire or explosion that follows an earthquake is already covered by the basic policy, not by the endorsement.

Emergency Program

A primary level of protection given to a resident of a community who is new to the flood insurance program.

Excess Liability

Excess liability insurance is designed to provide excess limits of coverage above the limits of applicable underlying coverage.

Federal Flood Insurance Program

Coverage for qualifying residents and businesses in flood-prone regions through the National Flood Insurance Act, a federally subsidized flood insurance program enacted in 1968.

FEMA - Federal Emergency Management Agency

A federal agency tasked with responding to, planning for, mitigating, and recovery efforts of natural disasters.

Flood

Coverage protecting the insured against loss or damage to real or personal property from flood. (Note: If coverage for flood is offered as an additional peril on a property insurance policy, file it under the applicable property insurance filing code.)

Hull Insurance

Coverage for damage to a vessel or aircraft and affixed items.

Mobile Homes - Homeowners

Homeowners insurance sold to owners occupying the described mobile home.

Mobile Homes under Transport

Coverage for mobile homes while under transport for personal or commercial use.

NFIP - National Flood Insurance Program

Flood insurance and floodplain management for personal and business property administered under the National Flood Act of 1968. Encourages participation by private insurers through a flood insurance pool.

Umbrella Policy

Common type of excess liability insurance. Provides additional limits, with a combined blanket single limit, over other existing liability cover areas such as Commercial General Liability and the liability sections of the homeowners and auto policies.