By Eileen Sullivan • January 11, 2018

Why isn’t flood covered by homeowners insurance?

This question pops up after every major flood event. Homeowners face a harsh reality when they realize thousands of dollars’ worth of damage will in no way be covered by their homeowners insurance. With flood being such a destructive and costly damage event, why isn’t it covered? Why is rain, hail, wind and tornado damage covered, but not flood?

The real question we should be asking is, what risks do the home and homeowner face? Once we answer this question, by analyzing related factors of a home, an agent (with the help of an underwriter) can determine which coverage types and provisions are needed by each insured. Homeowners insurance policies are meant to be tailored to the variables of each home and lifestyle of the insured (location, size, features, age of the home, etc).

If flood risk were built into all homeowners’ policies, many would complain that they are paying for coverage they don’t want or need. Everyone’s policy would be more expensive. When, in reality, flood risk varies greatly depending on location and the way the house is built (i.e. elevation, basement included). Homeowners have the option to purchase a policy to cover the risk of flood based on these factors. If they want it or need it, it is available. The problem is that many people don’t know their true risk. Even if at one point they knew it was a smart buy, maybe the premium goes up, and they decide not to renew it because the skies are blue and there are more urgent bills to be paid.

Flood coverage actually used to be part of a standard homeowners policy, but after a few major flood events from the 1920’s to the 1950’s, insurers chose to separate it due to several massive payouts, and a large portion of their losses coming from flood damage. Separating it would make for cleaner price setting of both flood and the remaining homeowner risks. But over the following period of time, the price setting of flood insurance and the number of willing buyers did not work in the insurance companies favor due to adverse selection. They were paying out more to losses than they could collect in premiums, partially because many people flooded that didn’t know they were at risk. Insurers stopped offering flood insurance and the government stepped in with their solution, creating the National Flood Insurance Program (NFIP) within FEMA.

Astute agents feel the burden of responsibility in ensuring their clients understand what’s contained in their policy, and what isn’t. Events like Hurricanes Harvey, Irma and Maria remind us that many policyholders don’t understand basic facts about insurance, and simply won’t take the time required to know their own policies, until it’s too late. It’s up to us to guide them in understanding their policies.

Wondering when innovative insurance companies of the modern day will figure out how to write flood insurance again? The time is now! There is now an alternative to NFIP insurance. It’s privately administered and provides many greater benefits than the government sponsored program. Learn more about the Myron Steves Residential Flood Program.