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Recommend Flood Insurance to Every Client

Rita Hollada, CIC, CPCU, CPIA

Flooding is the most common natural disaster in the United States. Yet every time there is a flood event, the media highlights the victims who chant in unison that they never knew that flooding was not covered by their homeowners insurance. Eventually, state insurance departments receive complaints, and legislators promise investigations. Finally, errors and omissions lawsuits are filed and agents find themselves trying to defend against two major allegations. They will be accused either of failing to advise clients to purchase flood insurance or of failing to advise clients of the limitations of flood coverage under the standard homeowners policy. It is a cycle that cannot continue. There is no longer an excuse: every insurance agent needs to know about flood insurance. Period.

That said, the first thing every agent needs to appreciate is just how broad the water damage exclusion is in most property insurance policies. It is more than a "flood" exclusion; it is an exclusion for all damage done by the overflow of a body of water, tidal water, waves, surface water, or flood, regardless of the source or proximate cause. The exclusion also applies to spray from any of these water events, whether or not driven by wind.

The definition of flood as found in the flood policies issued through the NFIP is far more liberal. The Flood Insurance Manual defines flood as partial or total inundation of normally dry land by water from virtually any source. It even includes "mudflow," which is described as a river of mud. These events are far more expansive than what one would normally think of as a "flood." The surface water or mudflow could be caused by a sudden downpour or the rupture of a water main, and definitely by a storm surge, regardless of the proximity to a body of water. By understanding the breadth of this definition, agents should appreciate that every client has a risk of being flooded. The only real question is "How great is that risk?"

Risk Assessment and Coverage Limitations

The NFIP provides a number of easy to use tools to help agents (and prospective policyholders) determine the degree of risk. One source of information is FloodSmart.gov. At this website it is possible to easily assess a risk by clicking on the "What is your risk?" button in the upper right corner of the home page and then enter a property address in the next screen. On this page, you can also use the "Test the waters" button to get dollar estimates of property damage based on various flood depths. It is even possible to view the appropriate flood map segment online to see the location of a property and its designated flood risk zone.

A flood zone determination provided by one of the numerous flood zone determination companies could also quickly determine risk. Once the flood risk level is known, an agent is in a good position to accurately discuss risk and coverage needs with an insured. Now the prospect or client can make an informed decision about the purchase of flood insurance. More importantly, the agent can document that the conversation occurred and secure a signature, if flood insurance is rejected. ACORD provides Form 60, the Flood Insurance Notice/Rejection form, which is ideal for this purpose. You can access this online through ACORD's form page.

When the agent begins to discuss with a client the purchase of a flood insurance policy, it is important to stress the limited coverage provided by various flood forms. Some standard carriers will offer flood as a covered peril on some commercial property and inland marine forms. However, it is important to research the actual policy language because coverage can be limited. For example, some forms will not extend to properties in an "A, V, or shaded X zone." Agents need to know the significance of this language and realize that any policy that covers flood except properties located in an "A, V, or shaded X zone" is not covering much!

In the "Zone"

Every community participating in the NFIP has been extensively mapped to identify hazard areas. These are known as flood zones. Areas with the greatest risk of flooding are known as Special Flood Hazard Areas (SFHAs) and are designated as A or V zones on the maps. SFHAs have a 1-percent chance of flooding in any given year. The X zones (formerly called B and C zones) are moderate- or minimal-hazard areas. A shaded X zone is perceived to have a greater likelihood of flooding than an unshaded X zone, although statistics do not actually confirm that.

Flood policies offered by the NFIP provide coverage to insured property, regardless of flood risk zone. The zone determination, however, does affect the rating criteria and construction requirements of the individual policy. Every property is individually rated in the NFIP, according to its date of construction, building type, and use, as well as its risk zone. Buildings in SFHAs must be elevated to a required minimum height above the floodplain if constructed after the establishment of the Base Flood Elevation posted on the community's flood map.

Coverage Limitations

Every agent needs to realize that the policy provided by the NFIP Servicing Agent or the WYO companies, is a limited contract. Assumptions relative to other types of insurance contracts cannot be made. The flood policy covers one thing and one thing only: direct damage by or from flood, as defined. In fact, the explanation requires that the damaged property have undergone some physical change as a result of the floodwaters. There is no coverage for consequential damage, indirect damage, financial loss, loss of use, additional living expenses, or extra expense. These losses are clearly excluded in the policy.

Additionally, there is no coverage for many types of property, including finished structure or personal property in a basement or under an elevated building, underground structures, decks or walkways outside the perimeter walls of a building, or any property in the open. Coverage is very limited for valuable items such as jewelry, antiques, or art. With regard to business personal property, there is no coverage for the property of others in the care, custody, or control of the policyholder.

Finally, agents need to explain the settlement conditions of NFIP policies. Most claims will be settled on an Actual Cash Value basis. This includes all personal property and all structure except for a single-family primary residence. The single-family primary residence may be eligible for a settlement based on the replacement cost with like kind and quality of structure items if it is insured to at least 80 percent of its replacement cost at the time of the loss. This is not an agreed value and definitely not guaranteed replacement cost. The maximum amount to be paid will be the amount of insurance.

The main lesson to be learned about flood is that every insurance client is at risk for flooding. Coverage for this most common event is principally available through the NFIP, which provides a limited coverage form. There is no promise of full indemnification; coverage is limited to insured structures and certain types of personal property. The only way to understand the full scope of the coverage is to read and study carefully the Flood Insurance Manual and the policy form. Complete information about the NFIP is available at the FEMA NFIP website. Spend the time now to avoid the problems later.

Rita Hollada, CIC, CPCU, CPIA is a member and has served as the Chair of the Flood Insurance Producers National Committee. She works closely with the staff of the NFIP on producer issues and as a liaison to the producer community. She is a member of the National Faculty of the CIC program and often works as a consultant to insurance agencies and companies. She can be reached at rita@insprofs.com.

Last updated on January 2, 2007