A Flood Insurance Policy is Often Misunderstood by Homeowners and Renters

Water damage and flood damage are two different types of risks. All home insurance policies exclude coverage in the event of flood damage. When two or more acres or more of dry land or two or more properties have been inundated, a flood has occurred. If the washing machine hose breaks or rain enters the house through a broken roof or window, water damage has occurred and coverage is provided through a homeowner’s insurance policy.

Compensation for flood damage is provided through a flood insurance policy. Unlike a home insurance policy offered by private institutions, this type of policy is available from the federal government. The National Flood Insurance Program (NFIP) is the government entity that provides these policies. NFIP is administered by the government through the Federal Emergency Management Agency (FEMA). NFIP works through private insurance companies to help make flood insurance policies available to landlords and renters. Private insurance companies use property and casualty insurance agents to sell a flood insurance policy to landlords and renters. The policy cost for a particular property does not vary from company to company or agent to agent. The primary factor determining the cost of the policy is the location of the property and its risk of flooding as determined by the NFIP. Flood maps are used to predict flood risk in a particular geographic area, and the specific elevation of a property determines the level of risk.

Flood insurance policies provide coverage for buildings and contents. Before the document becomes effective, there is a waiting period of 30 days from the date of purchase. Historically, about 25% of flood insurance claims come from low to medium risk areas. As premiums are lowered in lower risk areas, property owners and renters will pay a reasonable amount for a policy regarding the risk they face due to flood damage. For high-risk areas, a mortgage lender is required, by federal law, to require a property owner to purchase a policy that provides insurance coverage for the building in the event of a flood. Covering contents is not part of the requirement.

A small amount of flood water can cause thousands of dollars in damage. All property owners and tenants should carefully consider purchasing a flood insurance policy to protect their buildings and contents. Keep in mind that the lender will only require a policy if the property is in a high-risk area and only to cover the building. Remember, too, that a large proportion of flooding occurs in low-risk areas. Finally, don’t forget the 30-day waiting period before your flood insurance policy takes effect.

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