Flood Insurance

An interesting paradox surrounds the concept of flood insurance.  There is a principle called “adverse selection,” which is basically the prevalence of people living in areas most affected by the specific peril of flood to buy flood insurance.  In traditional insurance, the providers of insurance use the economic law of large numbers that pits claims against fees, judging that the incoming fees for insurance purchases will pay for the small number of claims of insured individuals who have suffered losses.  In the case of flood insurance there is an overwhelming number of claims compared to the number of potential buyers interested in protecting their properties from the peril of floods.  This means that an insurer cannot offer flood insurance and cover their costs, which equates to an unacceptable risk on the part of the insurance company.   This has resulted in the federal government stepping in to provide an alternative.

Federal Disaster Assistance for Floods:

Generally, the federal government does not automatically provide monetary assistance in the case of flood as a natural disaster.  Typically the government will offer low interest loans to cover flood damage, which must be repaid.  However the federal government did establish the National Flood Insurance Program in 1968.  The NFIP provides a federally funded insurance option for homeowners, renters and business owners.  The NFIP requires that communities that participate agree to adopt and enforce ordinances that are in compliance with FEMA (Federal Emergency Management Agency) regulations, and meet or exceed these requirements.  Under the provisions of this program anyone can purchase flood insurance as long as their community is a participant in the NFIP.

Medium to Low Risk Flood Areas:

Many people wonder if they need flood insurance if they do not live in a high risk flood area.  It may be a good idea.  Statistics show that approximately 25 percent of claims come from areas with medium to low risk of floods.  Some people will qualify for a “Preferred Risk Policy,” which is low cost flood insurance.

Mortgage Lenders and Flood Insurance:

When the federal government is involved with the financial assistance in the acquisition and/or construction of a building in a high-risk flood area, flood insurance is mandatory.  If the area is of medium-to-low risk of floods, flood insurance may not be required by federal law; however the lender may still establish its own requirements to include flood insurance.  If the status of the area changes from medium-to-low risk to high risk during the life of the loan, the lender has the right to modify the agreement to require flood insurance.  Many insurance providers offer Excess Flood Protection, which insures for flood damage above the limits of what the NFIP offers.

For more information regarding flood insurance, or to determine the risk status of a property or geographical area, call Chad Olsen of SoCal Platinum Insurance.  Chad will provide the answers regarding your flood insurance concerns and find you the best solution suitable for your needs.