Studies indicate that one out of five people believe flood is covered under their homeowner's policy. This suggests the majority of property owners understand they can only receive flood insurance by purchasing it separately. [Bankrate.com]

After Superstorm Sandy, interviews with some homeowners revealed they simply didn't purchase flood insurance because it lacked the two coverages they felt were necessary: Basement coverage and additional living expense.

In one example, a restaurant owner candidly pointed out he already had the means and the employees willing to renovate and re-open to a strong customer base that hadn't evacuated. Under these circumstances he had little time for regulations and insurance procedures, but mentioned he would be more inclined to purchase flood insurance if it included more coverage he considered valuable, like business income interruption and extra expense.

Is the NFIP keeping up with current market needs?

The NFIP was created in 1968 by the U.S. federal government in an effort to provide standard flood insurance for a risk considered too catastrophic for the private market.

“Coming up on its golden anniversary, the program has served its purpose of protecting American homeowners and business owners, stabilizing real estate markets, categorizing flood risk within the floodplains and promoting responsible land management,” said Keith Brown, CEO of Aon National Flood Services, a third-party NFIP administrator on behalf of insurance companies participating in the Write Your Own (WYO) flood program.

Over recent years, many of these achievements have come under pressure, including: flood maps, rates, and the $23 billion debt owed to the U.S. Treasury. Is the NFIP suffering from an identity crisis? Is it too constrained by legislation to achieve its objectives? One just needs to reference the Biggert-Waters Flood Insurance Reform Act of 2012 and Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) to understand the challenges.

There has been considerable discussion at the legislative level about the inadequacy of rates, especially the subsidization of the highest risk properties [GAO], and the product offerings available with the NFIP.

“The homeowner is aware of the coverage that exists in their homeowner's policy and expects that the same coverage is present in their flood policy,” said Terry Black, vice president of claims at Aon National Flood Services. “One of the hardest conversations with a homeowner right after a devastating flood is the one explaining there is no provision for additional living expenses.”

A quick comparison of homeowner's and NFIP flood insurance

Black explained that the differences between a typical homeowner's insurance and NFIP flood insurance include other coverages as well. The chart below illustrates many of the differences between the two policy forms.

Looking to the future

There are currently 5.2 million homes insured through the NFIP and that number is falling. [Bankrate.com]

“There is some anecdotal evidence that homeowners have begun to take advantage of more sophisticated flood products,” said John Dickson, president of Advanced Insurance Coverages, Inc. (AIC), a broker specializing in private flood solutions.

“By imposing new policy surcharges and increasing certain rates, Biggert-Waters and HFIAA opened the door to the private market to compete with the NFIP,” Dickson said. “While we are focused on improved flood insurance pricing, we also provide products that fill the NFIP coverage gaps around basements and additional living expenses.”

One such policy offered by AIC is FloodWrap, a policy designed to address the NFIP coverage gaps. Excess Flood insurance is also offered by AIC and can increase the limits of eligible NFIP policies up to $20 million based on specific risk type.

Private insurance flood policies that serve as an alternative to the NFIP are offered through large well-capitalized companies. Recognizing the significant risk flood represents, these products are emerging in a disciplined and structured manner. For example, the private flood policy offered through AIC is available only for single family homes located in 'A' flood zones.

What can agents do to stem the rising tide of flood losses?

“Every time an agent writes a homeowner's policy, they should be quoting flood insurance,” said Brown. With WYO programs now available to many agents and brokers, writing and issuing flood policies is much easier than it was previously.

“By offering flood coverage at the point of the homeowner sale, in addition to offering protection to your clients from devastating losses, you're also helping to protect yourself from potential errors and omissions claims,” said Brown.

It is recommended that agents quote flood with all Homeowners quotes and allow the insureds to decide whether they wish to purchase via a waiver form similar to uninsured/underinsured motorist coverage. This provides the insured with a risk analysis and associated premium while also reducing agent risk of E&O exposure.

There are several resources available online like flood maps, loss calculators, videos and other educational materials for agents and consumers. [floodtools.com, FloodSmart.gov]

Agents should also explore the new private flood insurance market. With recent legislation and a wave of new products “flooding” the market that may offer lower premiums and more expansive coverage, the future of flood insurance offers new possibilities for both agents and their clients.

This article is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article. Only the relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.