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. Only people in areas designated by the NFIP as flood-prone may purchase flood coverage. The federal government designates these areas as being in a “flood plain” or “flood zone.”

When flood insurance first becomes available in a new community, policies written during the initial 30 days may become effective sooner, depending on FEMA rules at the time. Otherwise, a policy is generally subject to a standard 30-day waiting period, with limited exceptions (such as loan closings or map revisions).

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:

• Building:

  • Single Family - $35,000
  • Other residential - $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. Rates are no longer subsidized, 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 that is removed is covered at its new location for up to 30 days on a named peril basis. 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. To meet the FEMA Standard Floor Policy -SFIP- definition of a flood, there must be inundation of two or more acres of normally dry land or two or more properties due to overflow, surface runoff, or mudflow. Flood may also include mudslide, mudflow, surface runoff flood related erosion of shorelines or lake overflow that are caused by the accumulation of water on or underground. Mudslide is not covered. Mudflow: This is covered under flood insurance. It refers to water-saturated soil moving as a liquid, almost like a river of mud. NFIP policies treat mudflow as a type of flood because the movement is driven by water. Mudslide: This is not covered by flood insurance. A mudslide is considered an earth movement, similar to a landslide, where earth or debris slides downhill mainly due to gravity rather than water flow. 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:

• If the NFIP considers the exposure low risk, the standard deductible is $500.
• If the NFIP considers the exposure high risk, the standard deductible is $750.

Higher deductibles may be selected to reduce premium. These deductibles range from $1,000 to $5,000 (in increments of $1,000).

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. Losses are subject to a deductible.

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 named insured includes:

• The named insured in the declarations
• 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:

1. The residence premises
2. Vacant land other than farmland owned by the insured
3. Individual or family burial or cemetery plots
4. Any premises acquired by the insured during the policy period if used for nonbusiness purposes and…
5. 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 $500 if the insured is responsible for 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.

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: 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.

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 losses resulting from fire, explosion, flood, or tidal wave following the covered event.

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 combines blanket single limit, over other existing liability cover areas such as Commercial General Liability and the liability sections of the homeowners and auto policies.