Definition of Excess Flood Insurance
The vast majority of flood insurance policies are written through the National Flood Insurance Program, a federally subsidized insurance system under which homeowners in high risk areas are required to buy insurance. The highest value NFIP policy only covers $250,000 for a building and $100,000 for the contents of the building. Homeowners in high risk areas -- think beachfront homes -- typically have property worth much more. Excess flood policies are additional policies you buy from private insurers to cover damage in excess of NFIP limits. With an excess flood policy, the NFIP covers damage up to its limits. The excess policy can cover the remainder -- up to its limits, which may be as high as $5 million.
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Why the NFIP
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The federal government created the NFIP because private insurers found it too expensive to offer flood insurance. Homeowners who bought flood insurance typically did so because they had prior knowledge of floods on their property. Therefore, private insurers had no way of spreading the risk of flood to homeowners who had little or no risk. This made premiums very expensive, and at the same time forced the insurance company to pay huge sums when there was a flood. The federal government forces homeowners in high risk areas to buy flood insurance through banks. The banks want the federal government to underwrite the mortgage. As a condition of the underwriting, banks must require flood insurance on mortgages in high risk areas.
Homeowners Insurance
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The NFIP defines a high risk flood area as those that have a 1 percent chance annually of flooding. This translates to a 26 percent chance of flood loss over the life of a 30-year mortgage, according to Floodsmart.gov. Homeowners' policies rarely cover flood risk. Coverage through the NFIP is available for homeowners in low and moderate risk areas. About 25 percent of flood claims come from low and moderate risk areas, the NFIP says.
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Private Flood Insurance
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Private flood insurance is available, but it is fairly rare, and usually is not competitive with rates established by the government. One insurance company told the Government Accountability Office in a 2009 report that 80 percent of its flood insurance policies were excess flood coverage, while the remaining were primary insurance policies. Insurers in the report also noted that a policy that cost $500 through the NFIP would cost $900 on the open market. These private insurers market to high net worth households, according to the GAO, with homes that are generally worth more than $1 million.
Finding Coverage
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NFIP insurance is sold through private brokers, who may be able to offer excess flood coverage. According to the Small Business Administration, excess flood insurance is generally offered through specialized insurers such as Lloyds and AIG. Independent agents may sell coverage through these companies.
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References
Resources
- Photo Credit flood sign image by Andrew Breeden from Fotolia.com
