Understanding Flood Insurance Requirements and Limits

Most standard homeowners insurance policies don’t cover floods when those floods arise from weather events like storm surge, river swells or heavy rains. However, many people live in areas that are at risk for these catastrophes. If they occur, then they can prove extremely expensive. Even one inch of floodwater in a dwelling might cause thousands of dollars' worth of damage.  

The benefits provided by flood insurance are often too critical to avoid for many homeowners. As a result, you’ll need to work with your insurance agent to figure out the best way to get coverage. If you have a requirement to buy coverage, then you will need at least the amount mandated. However, you often have leeway to increase your coverage to better suit your benefits. 

Understanding the Flood Insurance Marketplace  

The vast majority of flood insurance policies in the United States are underwritten by the National Flood Insurance Program (NFIP). Though private flood insurance is another option, many insurers do not offer these policies because of the exceptional risk associated with insuring homes against flooding. Usually, a NFIP policy is the coverage solution for the average homeowner.  

Because the NFIP is a government program, it sets both requirements for certain people to get coverage and includes its own limits for how much protection it will provide.  

Under the NFIP, residents of areas designated as high-risk flood zones must buy flood insurance. To determine if you have a requirement, you can speak to your insurance agent and your realtor. They can help you gather the appropriate documentation to set up the right policy. Then, you will be able to have protection against the potential hazards that might arise.  

Flood Insurance Requirements  

When you buy a home, you might finance it through a bank or other mortgage lender. As a result, these entities might require you to buy homeowners insurance. By placing this requirement, the lender protects their investment in your property. Flood insurance requirements work much in the same way.  

If you buy a home in a flood zone, then this area has a high risk of flooding occurring. Therefore, lenders will want the property to have protection against this threat. NFIP rules therefore require that homeowners who 1) live in flood zones and 2) have a mortgage from a bank backed by the government, must have flood insurance.  

The policyholder must obtain coverage based on the development cost of their property.  

If you do not have a mortgage, then the flood insurance requirement does not exist, even if you live in a flood zone. However, that does not mean you should go without coverage.  

By failing to have flood insurance, you leave yourself exposed to significant property damage risks if floods occur. Though you might have paid off your mortgage, the home and its contents still have value to you. You are wise to invest in coverage that adequately insures the value of your household.  

Choosing your Flood Insurance Coverage

Choosing the right amount of flood insurance can feel daunting. You will have to meet coverage requirements set by the NFIP. Still, those policies will also have limits to what help they will provide.   

How much the policy pays for your damage will depend on whether it pays based on an item’s actual cash value or its replacement cost value. The replacement cost value is the cost to replace a damaged item with a new item of similar value. The actual cash value will pay only the value of the item in question based on its depreciated, used value.  

You might wonder what to do if you have a home worth more than the maximum limit of an NFIP policy. In this case, you have two choices. You can either buy an NFIP policy with the maximum $200,000 limit, or you can invest in a private flood insurance policy which offers more protection. Your agent is happy to help you determine the best course of action based on your insurance needs.  

Never hesitate to come to us with all your flood insurance questions. We know it can be a tough industry to understand, and we’re here to help you do so.