NFIP (FEMA) Flood Insurance Vs. Private Flood Insurance
Flood insurance is required for many properties but choosing a policy can prove difficult. From the broadest perspective, there are two primary choices for flood insurance coverage: FEMA flood insurance or a privately funded policy.
Demand Is Outpacing NFIP’s Coverage
According to a study conducted by researchers from the U.S. Environmental Protection Agency, Nature Conservancy, and the University of Bristol published in the journal Environmental Research Letters, nearly 41 million Americans already live in 100-year floodplains.
These numbers mean roughly three times as many people are in need of flood insurance than the current FEMA maps show. The combination of rising sea levels and unchecked coastal development makes clear that the number properties that will need flood insurance is much larger than the 5 million policies written by the NFIP today, and that means many are turning to private insurance providers.
The Contrasts Between FEMA & Private Plans
The “National Flood Insurance Program” (NFIP) ran by FEMA not only offers affordable policies to area residents, it also ensures public structures and works to encourage the communities to enforce new regulations regarding the management and reaction to floods.
With their outreach efforts in place, more communities are creating flood plans and that, in turn, helps lower FEMA’s cost to run the program since a flood plan helps to mitigate a flood’s effect on new structures that have improved design to help them withstand future floods.
However, NFIP is not available in all areas and many owners find that their residences and businesses exceed the limits set by NFIP. That’s when they’ll turn to a private insurance company for flood protection. Thousands of private insurance companies across the country offer their own insurance policies. A private insurance policy will have the same coverage as FEMA’s policy but has the ability to offer higher limits of coverage.
For residences, these limits can go beyond $250,000 for the building and $100,000 for the contents of the building. Non-residential limits go beyond $500,000 for the building and $500,000 for the contents. Plus, for businesses, business interruption coverage is also available as part of the flood insurance policy.
Coverage for Non-Designated Flood Zones
Not all communities participate in the NFIP program. In a community that does not participate in the program, residents have no choice but to choose a private insurance company or forego flood insurance altogether.
With the private policy, coverage is available in every state and it is available for all properties located within a flood zone, excluding only mobile/manufactured homes. The private policy services CBRA designated areas along with communities that don’t participate in the NFIP program.
How FEMA & Private Insurance Compare
Both a private insurance policy and FEMA flood insurance policy must be purchased through a licensed agent.
For private policyholders, the dwelling must be the principal residence of the policyholder and be insured for 80% or more of the full replacement cost (or hold the maximum amount of insurance available from NFIP) in order to qualify for replacement cost coverage in the event of a disaster.
A principal residence is one occupied by the owner at least 80% of the calendar year preceding the loss or 80% of the period of their ownership within the building (if less than one calendar year precedes the loss).
If the insurance applicable to the dwelling is under 80% of the full replacement cost and less than the maximum NFIP insurance amount available, the loss will be paid on Actual Cash Value, which is replacement cost minus depreciation.
Secondary homes, outbuildings, and commercial property will also be settled on an actual cash value basis. The replacement cost coverage can be added to a private policy as an endorsement, but an additional premium will be incurred.
Balancing Affordability & Protection
Private flood insurance plans come at competitive rates and have a wide selection of deductible options available to the policyholder. Typically, the deductible is about 2% of the requested coverage amount.
A recent study by the actuarial firm Milliman found that 69 percent of Louisiana property owners, 77 percent of Florida property owners and 92 percent of Texas property owners could find more affordable options in the private market than through the NFIP.
What To Expect
Even though is it still far smaller relative to the federal program, the private flood market is maturing quickly and is now paying real claims. For example, in the District of Columbia, the majority of flood coverage (65.9 percent) is privately underwritten.
Lenders and borrowers need private flood to help close the protection gap. Whether a borrower chooses private or FEMA flood insurance, lenders must pay close attention to flood insurance policies and providers as many borrowers will turn to their lender for guidance.