FLOOD INSURANCE

Flood Insurance and the Role of an Insurance Producer Basic Knowledge Needed by Every Producer

A flood is defined, for purposes of insurance as, "an overflowing of water or mud onto land that is normally dry." Note that this definition makes no distinction between floods and flowing mud. It also does not delineate between floods with natural causes and those with non-natural causes such as dam breaks and no distinction between overflows from streams, ponds or lakes, tidal or wind-blown overflows, or overflows as a result of the failure of mitigation systems such as levees. Floods are the Nation's number one natural disaster. The standard flood insurance policies issued through the NFIP are geared either to private residences or to businesses. For direct physical flood damage to property up to the replacement cost or actual cash value (ACV) of actual damages (or the policy limit of liability, whichever is less) the first pays up to $250,000 to homeowners and the second pays up to $500,000 to businesses. Coverage for basements, crawlspaces and ground-level enclosures on elevated homes is limited. Possessions are not covered under a standard policy. For an additional premium, coverage of damage to personal property can be obtained for up to $100,000 for homeowners or renters and up to $500,000 for businesses. Additional "Increased Cost of Compliance" (ICC) coverage is also available. If a flood damages your property, an owner may be required by law to bring a property up to community and/or state floodplain management standards. ICC coverage is provided to cover up to $30,000 of the cost to elevate, flood proof, demolish, or relocate your property. ICC coverage is in addition to the coverage you receive to repair flood damages; however, the total payout on a policy may not exceed $250,000 for residential buildings and $500,000 for non-residential buildings. The Preferred Risk Plan (PRP) is offered to properties outside high-risk areas. Premiums range from $129 a year for minimal coverage to $460 a year for maximal coverage. The average flood insurance claim is $42,000 (NFIP figures 2008-2012); average damage from 1" of water in a 2,000-square-foot home is estimated at $20,000; damage escalates rapidly if water level is higher. (Flood Risk and Insurance: Know the Fact) Excess Flood Insurance is the term generally used for policies from private insurers that supplement the NFIP program. These policies are activated only when a valid NFIP claim is exhausted. The NFIP is a multi-faceted program. Flood insurance is only one aspect of the NFIP. The NFIP also works to enforce no-build zones in known flood plains and relocate or elevate some at-risk structures. Pre-Disaster Mitigation grants are available through the NFIP to acquire property for conversion to open space, retrofit existing buildings, construct tornado and storm shelters, manage vegetation for erosion and fire control, and small flood control projects. The Community Rating System (CRS) was initiated in 1990 by the NFIP to reward communities that voluntarily exceed minimal standards for flood prevention and protection of structures. Of the more than 20,000 communities that participate in the NFIP, about 1,000 are enrolled in the CRS (mainly in areas that have suffered repeated flooding). The CRS offers lower premiums to communities in the program. Rates for flood insurance are based on the Flood Insurance Rate Map (FIRM) created and maintained by the NFIP. There are nearly 100,000 FIRMs currently in force. The FIRM designates "Special Flood Hazard Areas" (SFHA). These are designated on the FIRM by an "A" for a floodplain and a "V" for areas subject to water at velocity (coastal locations). Structure within a SFHA can be required to have a Standard Hazard Determination Form on file with a government-backed lender and proof of flood insurance adequate to pay off the balance of the loan in the event of a flood. Residences not in high risk flood areas on the FIRM are noted with a "B" or "C" (on older maps) and with an "X" (on newer maps). Risk estimates are termed in years. For example, a 100-year floodplain means that there is a 1% chance of flooding in any given year NOT that there is a regular pattern of flooding every 100 years. It is a risk assessment figure, not a prediction nor a pattern. A 1% chance is sufficient to be considered a "high-risk" flood area.

Myths vs. Realities Reality

NFIP flood insurance is most often sold through private insurance companies and agents. The federal government backs it. Insurance can also be purchased directly from the NFIP. Government assistance after a flood is usually limited to loans which have to be repaid. Figuring out how to deal with a flood is your responsibility and can be managed through insurance, loans, or personal assets not government bailouts. If your community participates in the National Flood Insurance Program (NFIP), you can buy National Flood Insurance no matter where you live. As long as your community is in the NFIP, you are eligible to purchase flood insurance even after your home, apartment, or business has been flooded. You can buy National Flood Insurance anytime - but the policy isn't effective until a 30-day waiting period after the first premium payment. However, this 30-day waiting period can be waived if the policy was purchased within 13 months of a flood map revision. If the initial flood insurance purchase was made during this 13-month period, then there is only a one-day waiting period. This one-day provision only applies when the Flood Insurance Rate Map (FIRM) is revised to show the building is now in a high-flood-risk area. Coverage for basements is limited, as with any building area with a floor below ground level on all sides. Improvements - finished walls, floors or ceilings - are not covered but structural elements and essential equipment are covered, including pumps, holding tanks, furnaces, water heaters, air conditioners, foundation elements, stairways, and cleanup expenses. Personal possessions in a basement are covered in exactly the same way as possessions anywhere in the home if the insured has purchased that form of coverage. We can't predict when floods will occur, but we can usually tell where they will occur. Just because it hasn't flooded in the past doesn't mean it won't in the future. Just because you had a flood does not mean it won't happen again soon. Floods are caused by weather conditions and are unpredictable. If the conditions are right, floods will occur again. All areas are susceptible to flooding. Anywhere it rains, it can flood. Everyone lives in a flood zone. The range is from low to high risk; there are no "zero-risk" flood zones in the U.S. People outside of mapped high-risk flood areas file more than 20 percent of all NFIP flood insurance claims and receive one-third of Federal Disaster Assistance for flooding. Real estate agents usually don't know whether flooding has ever occurred on the property. Vast improvements can (and should) be made to protect against or reduce flood damage. It is almost impossible to "fix" a flood problem. Water damage is the number one claim filed against insurers. Private basic homeowners, renters, or commercial insurance policies will not cover a structure or the possessions it contains from flood damage. Other forms of insurance providing coverage for flooding, such as excess flood insurance or difference in conditions insurance, are available through private insurers but only as a supplement to NFIP backed insurance policies. Never assume that your home is insured against flood damage in the absence of an NFIP Flood Insurance Policy.

Flood Insurance: Yesterday, Today, & Tomorrow Homeowner Flood Insurance Affordability Act (HFIAA) Grandfathering

A new purchaser will be allowed to assume the prior owner's flood insurance policy and retain the same rates until the guidance is finalized. Also, lapsed policies receiving Pre-FIRM subsidized rates may be reinstated with Pre-FIRM subsidized rates pending FEMA's implementation of the rate increases required by the Homeowner Flood Insurance Affordability Act. Properties newly mapped into Special Flood Hazard Area will retain preferred risk policy rates for at least one year after the FIRM change.

Becoming an NFIP Agent Writing a Policy In the Event of a Flood

Advise your client when he or she purchases Flood Insurance to take the precaution of storing a copy of the policy where it won't be subject to flood damage. After a flood, the customer should contact his or her insurance agent, who will arrange for an adjuster to inspect the damage. Advise your client to obtain a signed "Proof of Loss" from the adjuster. Without a valid Proof of Loss from an adjuster or other licensed appraiser, no damages are paid to the victims of a flood.

Becoming an NFIP Agent Writing a Policy

All policies are provided through the NFIP, whether purchased directly from the NFIP or (as is more common) issued as a WYO policy through a private insurance issuer. All policies have coverages and premiums set on a nationwide basis by the NFIP. There are several steps involved in the process of informing a customer of his or her options for flood insurance and in writing a policy.

The NFIP Is

An agency to map flood risk, encourage flood risk mitigation, and offer "affordable & available" flood insurance.

Becoming an NFIP Agent Writing a Policy Is the Property Located in a Community That Participates in the NFIP?

An overwhelming majority of communities participate in the NFIP and new communities are added to the program over time. If you have any doubt, there's an online tool to determine if the community participates in the NFIP.

Becoming an NFIP Agent Writing a Policy Is the Building Pre-FIRM or Post-FIRM?

Any building constructed before and not substantially altered since the adoption of a FIRM for that community is offered a subsidized premium that doesn't reflect the true risk but gives the same protection as an unsubsidized rate. The building is "grandfathered" into the NFIP program. You need to determine the building's date of construction, the dates of any alterations to more than 50% of the structure, and the date of the appropriate FIRM.

Becoming an NFIP Agent Writing a Policy Is an Elevation Certificate Required?

Any structure in a high-flood hazard area will need a Base Flood Elevation (BFE) certificate on file. This certifies to what extent that structure is subject to a 1% risk of flooding in any given year. If the owner doesn't have a needed BFE, it may be on file at the local planning department or can be obtained through the services of a land surveyor, architect or certified engineer. An alteration to the structure for the purpose of improving the BFE can result in dramatically lower premiums.

Case Law Apportionment

By far the most active court challenges with regard to flood insurance concern how much damage has been apportioned to flooding vs. other causes (principally wind). Damage to a structure and possessions resulting from the peril of wind is most often covered by a privately issued basic P&C insurance policy. Damage resulting from flooding is only covered by an additional policy, usually through the NFIP, with some supplemental coverage in a private EFI plan. The adjustor who assesses how much damage can be apportioned to these discrete causes is hired by and works for the issuing company, usually a private insurer. The same adjuster may be making the assessment for both policies, if there is both a basic policy and a flood insurance policy. In cases where only a basic policy and no flood insurance policy applies, apportionment is made for the percent of damage due to wind (which is covered) and flooding (which is not covered). Numerous court challenges have been brought alleging that private insurance adjusters have an incentive to apply as much damage as possible to flooding and not to other causes. Since the private insurer pays for damages related to covered perils in its policies, the incentive is to make the damages assessed for wind (for example) as low as possible and the damages assessed to flooding as high as possible. Damages paid for flood damage don't come from the assets of the issuer of record but from the NFIP and ultimately the U.S. Treasury. This issue becomes particularly relevant to a claim when the insured has no flood protection policy or the limits of their flood insurance is insufficient to cover the damages apportioned to flooding. Courts have overwhelmingly found in favor of insurers in these cases, generally on the basis of facts. That is, the damage resulting from causes such as wind is generally clear as to causation. Damage resulting from flooding is also clear. Despite incentives to over-estimate damage due to flooding and under-estimate damage due to other causes, courts have rarely found a malignant pattern of improper apportionment. As a result of persistent allegations and court cases claiming improper apportionment, the GAO undertook a study of the problem and published its findings in 2008. No pattern of improper apportionment was uncovered nor any concerted attempt to defraud the NFIP by private insurers by assessing damages in excess of those directly caused by flooding. The one problem that was uncovered was a lack of transparency on the part of private insurers as to means for apportioning claims.

Becoming an NFIP Agent

Every licensed property insurance agent can sell flood insurance through the NFIP (unless restricted or prohibited by their agent agreement with their company). Federal regulations require agents selling flood insurance from the NFIP to take three hours of flood insurance training. The schedule of trainings offered at specific locations is listed on the floodsmart.gov website. The same website has a schedule of trainings done as "Webinars."

Myths vs. Realities

Floods are infrequent but terrifying and overwhelming events. Fear and unfamiliarity breed misunderstandings and ignorance. The prevalence of misinformation and ignorance about flood insurance is one reason so few people participate in the program. As an insurance producer, it's vital that the information you supply to customers takes into account common perceptions about flood insurance so that you can provide the best current information to them.

Becoming an NFIP Agent Writing a Policy How Much Insurance is Required or Selected?

If the property is in an SFHA it must have flood insurance sufficient to cover any mortgages or to cover the full replacement cost of the structure, whichever is lower. If there is no mortgage or the property is in an NSFHA (Non-Special Flood Hazard Area), having flood insurance is optional but may be highly advisable. The amount of coverage at or above mandated levels and size of the deductible in this case can be determined by the insured. The issue of coverage for possessions (up to $100,000 for residence and up to $500,000 for businesses) should be addressed. This coverage is always optional but may be as important to the insured as coverage for the structure since flood damage of possessions may be higher than damage of the structure under some circumstances. Excess Flood Insurance should be offered once the NFIP maximum coverage has been met. It is essential that all discussions about coverage choices should be documented, particularly if coverage is diminished or declined for any reason.

Flood Insurance: Yesterday, Today, & Tomorrow Homeowner Flood Insurance Affordability Act (HFIAA) Surcharge

In order to offset the losses from repealing parts of BW-12 and to ensure solvency of the NFIP, all policies (regardless of assessed flood risk) will be assessed a $25 annual surcharge for a primary residence and a $250 surcharge for other properties. The surcharge will be eliminated once annual increases on high-risk properties eliminate all subsidized rates.

Becoming an NFIP Agent Writing a Policy Forms and Terms

NFIP forms are available online from FEMA and the insurance company you represent should be able to supply forms as well, including forms to document customer decisions regarding coverage. Premiums are enforced on a national basis.

Case Law Punitive Damages

One advantage of having flood insurance issued through the NFIP is that government programs and their agents are, in general, protected against punitive damage or extra-contractual claims. Therefore, although legal actions are filed against the WYO insurer (Federal employees or entities are almost never parties to legal action), the protection against punitive damages is extended to the private insurer who administers the policy. Additional damages to cover court costs are sometimes assessed.

The Biggest Problem Facing Flood Insurance In America Today Is That

Only People Likely To Have A Flood Will Obtain Coverage

Errors, Omissions, Ethics, and Best Practices Homeowners, Renters, and Commercial Clients Renters

Renters are principally concerned with how a flood can affect their personal possessions. Like a homeowner's policy, basic Renters Insurance does not protect against the peril of floods. Some Renters Insurance is available, however, that will incorporate a NFIP policy covering possessions as a regular feature of or endorsement to the basic policy. Typically, renters are more often exposed to flood damage than homeowners, since rental properties are more often located at lower elevations than private homes. Renters in high-risk flood area should ascertain if their landlord has flood insurance but be advised that this insurance won't cover any of their personal possessions nor any loss of use or dislocations as a result of flooding. Regardless of an owner's coverage, renters in "A" or "V" flood risk areas should retain flood insurance coverage for their possessions and for loss of use. Renters in low to moderate risk areas may also opt for this coverage.

Flood Insurance: Yesterday, Today, & Tomorrow Recent Changes in the NFIP

The 2012 law has become highly controversial. Since many estimate that premiums had been maintained at 20-50% of true risk rates, the increases mandated in Biggert-Waters were substantial. A firestorm of protest erupted in response to announced rate increases. As a result, Congress began seeking ways to change or delay the law. The January 2014 Budget Bill delayed enforcement for nine months. Another bill introduced in early 2014 would have delayed enforcement until updated flood risk maps are instituted nationwide, a process likely to outlast the life of the Biggert-Waters Flood Insurance Reform Act. As a side note, one of the law's co-sponsors, Judy Biggert, lost her seat in the November 2012 election, but her loss to a Democrat was not likely related to reactions to this legislation. Her absence, however, removed the single most notable Republican defender of the law. On March 21, 2014, President Obama signed the Homeowner Flood Insurance Affordability Act of 2014.

Flood Insurance: Yesterday, Today, & Tomorrow Failure to Renew NFIP in December 2017

The Biggert-Waters Act was amended in 2014 with the passage of the Homeowners Flood Insurance Affordability Act, but expired December 5, 2017. Congress failed to enact new enabling legislation to extend the program past December 5 or to institute any changes or reforms (such as H.R.2875 - the National Flood Insurance Program Administrative Reform Act proposed in July 2017 but never passed). The House passed H.R. 2874, the 21st Century Flood Reform Act, on November 14, 2017, with a vote of 237-189, but it did not pass the Senate. Since legislation may change considerably before passage and may never, in fact, pass, the specifics are not yet worth exploring. Meanwhile, in order to avoid abrupt termination of the NFIP on December 5, 2017, Congress passed a continuing resolution that allowed the program to continue to operate under the Biggert-Waters provisions through February 8, 2018, extended by a second resolution to March 23, 2018, by a third resolution to July 23, 2018, and then by legislation extended the program, as is, through November 30, 2018. According to FEMA, "Congress must now reauthorize the NFIP by no later than 11:59 pm on November 30, 2018."

Flood Insurance: Yesterday, Today, & Tomorrow Homeowner Flood Insurance Affordability Act (HFIAA) Mapping

The Homeowner Flood Insurance Affordability Act creates a Technical Mapping Advisory Council (TMAC) to review the new national flood mapping program, to certify that FEMA is utilizing "technically credible" data and mapping approaches, and report its findings to Congress. It requires mapping to take into account flood protection systems, natural flood abatement features (e.g. wetlands), and to incorporate input from local communities in creation of FIRMS to maintain fair rates. The law also lifts the $250,000 cap when reimbursing homeowners who file successful map appeals based on a scientific or technical errors.

Case Law Jurisdiction

The NFIP is a national program. Both insurers and the NFIP have strenuously fought any attempts to bring actions on a State basis, preferring to have all litigation argued in Federal courts. Any attempts to argue flood insurance claims in State courts have been unsuccessful. Clear FEMA language included in every SFIP policy mandates that any litigation regarding claims be filed "within one year after the date of the written denial of all or part of the claim, and you must file the suit in the United States District Court of the district in which the covered property was located at the time of loss." As a result, all legal actions regarding the NFIP are always assigned to Federal courts. Similarly, attempts to use State courts as a venue to sue the private insurance company that issued the WYO policy have been denied. In Newton v. Capital Assurance Company in 2001 the 11th Circuit Court found that private insurers are acting as the "fiscal agent of the United States," and therefore any suit against the WYO Company may be brought only in Federal court.

Flood Insurance and the Role of an Insurance Producer The Standard Flood Hazard Determination Form

The Standard Flood Hazard Determination Form (SFHDF) is used to comply with Section 303 (a) of Title V of the National Flood Insurance Reform Act of 1994 (NFIRA). The SFHDF is used by Federally regulated lending institutions when making, increasing, extending, renewing or purchasing a loan for the purpose of determining whether flood insurance is required and available. The form may also be used by insurance agents, property owner, realtors and community officials for flood insurance related activities and flood zone documentation.)

Flood Insurance: Yesterday, Today, & Tomorrow A Brief History of FEMA & the NFIP

The National Flood Insurance Act of 1968 created the National Flood Insurance Program (NFIP). The intent was to provide every American flood insurance "on reasonable terms and conditions...with large scale participation of the Federal Government and carried out to the maximum extent practicable by the private insurance industry." The NFIP has 4 components... 1. Risk Identification/Assessment (mapping of flood prone areas) 2. Risk Mitigation (regulations that communities must adopt and enforce before high-risk areas can participate in the NFIP) 3. Insurance (federally supported flood insurance in communities that have joined the program) 4. Subsidization (new properties would be insured at actuarial levels; existing properties (at the time a map of the area is adopted) would be subsidized until such time as the structure sustained more than 50% damage by flooding; then it must be relocated or reconstructed in compliance with current regulations) It was the combination of risk identification, risk mitigation, and attrition - along with restrictions on the scope of insured losses insured under the flood insurance program - which was anticipated to provide this new Government insurance program, in contrast to past private flood insurance offerings, with a chance to succeed. The NFIP was initially under HUD (Housing and Urban Development) then became a component of FEMA (the Federal Emergency Management Agency) when that was created in 1979. FEMA in turn became a part of the Department of Homeland Security in 2003. Changes to the NFIP over the years include a 1973 requirement for structures in high-risk zones to have flood insurance whenever receiving federally insured loans (though no mechanism for enforcement was created until 1994). Despite these laws, about 25 percent of properties required to have Flood Insurance do not. A 2004 law attempted to restrict claims on structures suffering repeated losses (which amount to about ¼ of all claims) through a pilot program that has not yet been extended to all policies. By some standards, the NFIP is a signature achievement. Before the NFIP, there was almost no mapping of flood prone areas; therefore, actuarial data was non-existent. Now, mapping is widely available and relied on by lending and insuring institutions. Over 20,000 communities have joined the program, resulting in enhanced in flood mitigation efforts and improved building codes to reduce losses when floods occur. Nearly every American has access to some form of flood insurance. By the end of 2012, FEMA held 5.6 million policies, accruing $3.6 billion in annual premiums, covering $1.25 trillion in assets. By other standards, the NFIP might be considered a profound failure. Although having over 5 million structures insured would seem like a large number, a majority of structures in high-risk flood areas remain uninsured for flooding. In some regions (like the Northeast and Midwest), as few as 15% of high-risk structures are insured. (Congressional Research Service, February 2013. Attrition of subsidized loans from the program has been far slower than envisioned and even new developments sometimes given these artificially low rates. Even more concerning, there are estimates that less than 1% of structures outside high-risk areas have flood insurance. As a result, the NFIP has operated at a deficit during many fiscal years with the deficit being among the largest borne by the federal government in years with large events (such as Hurricanes Katrina and Sandy).

Flood Insurance: Yesterday, Today, & Tomorrow Homeowner Flood Insurance Affordability Act (HFIAA) Flood Insurance Advocate

The new law requires FEMA to designate a Flood Insurance Advocate to advocate for the fair treatment of NFIP policy holders. The Advocate will educate property owners and policyholders on individual flood risks; flood mitigation; measures to reduce flood insurance rates through effective mitigation; the flood insurance rate map review and amendment process; and any changes in the flood insurance program as a result of any newly enacted laws. The goal is to ensure accuracy, assist policyholders in maximizing protection and minimizing cost, respond to concerns about flood insurance rate map changes, and coordinate outreach and education.

Flood Insurance: Yesterday, Today, & Tomorrow Homeowner Flood Insurance Affordability Act (HFIAA) Affordability

The new law requires FEMA to prepare a draft affordability framework, which is due to Congress 18 months after completion of the affordability study being conducted by the National Academies of Sciences (begun as a part of BW-12). In developing the affordability framework, FEMA must consider accurate communication to customers of the flood risk, targeted assistance based on financial ability to pay, individual and community actions to mitigate flood risk or lower cost of flood insurance, the impact of increases in premium rates on participation in NFIP and the impact of mapping update on affordability of flood insurance. The affordability framework will include proposals and proposed regulations for ensuring flood insurance rates are responsive to the needs of low-income populations. The law requires premium reductions for residential basement floodproofing, increased maximum deductibles (with accordingly lower premiums), and encourages FEMA to minimize the number of policies where premiums exceed 1 percent of the coverage amount (requiring FEMA to report such premiums to Congress) exceed 1% of the coverage amount. HFIAA requires FEMA to regularly report to Congress how many premiums exceed 1% of coverages.

Flood Insurance: Yesterday, Today, & Tomorrow Homeowner Flood Insurance Affordability Act (HFIAA) Premium Rates for Subsidized Policies

The new law requires gradual rate increases (minimum 5%, maximum 18%) to properties now receiving artificially low (or subsidized) rates instead of immediate increases to full-risk rates required under BW-12. Properties not covered by these limits (and still affected by BW-12) are older non-primary residences insured with subsidized rates, severe repetitive loss properties insured with subsidized rates, and buildings that have been substantially damaged or improved built before the local adoption of a Flood Insurance Rate Map.

Becoming an NFIP Agent Writing a Policy What are the Specifics of the Property?

There are numerous factors that affect how the property will be assessed by the NFIP. You need to clarify what is the occupancy of the building, how many floors (including any basements or auxiliary enclosed areas) does it have, and what would be the replacement cost for the structure.

Flood Insurance: Yesterday, Today, & Tomorrow The Future

Continuation of the NFIP or some form of comprehensive national flood insurance is widely considered to be critical to maintaining real estate prices, economic development, and proper functioning of the insurance industry.

Case Law Force-Placed Flood Insurance, Complaints against Premiums

Courts have uniformly found that lenders have the legal right to purchase flood insurance on behalf of borrowers who don't abide by the requirements of coverage in the NFIP (i.e, force place the insurance). Courts have rarely held lenders liable for failing to ensure adequate coverage on properties when they accept proof of flood insurance or for failing to enforce the provision requiring proof of insurance. Finally, the courts have upheld the right of the NFIP to set and enforce rates and policies on a national level.

Flood Insurance: Yesterday, Today, & Tomorrow WYO Policies and the Private Insurance Role in the NFIP

Early in Reagan's Presidency, the new Federal Insurance Administrator (FIA) began formulating a new way to bring private companies back into flood insurance. In 1983, the FIA launched Write-Your-Own (WYO) Policies by which participating insurance companies could issue flood insurance on their own forms. With this arrangement, the company's name, not FEMA's, appears atop the declaration page, premiums are paid to the insurance company before being redirected to the NFIP, adjustors are hired by the insurance company, etc. While this approach did not eliminate NFIP direct insurance, within five years WYO accounted for more than 90% of all flood insurance policies, creating a public-private partnership with a still unfolding mixture of public and private responsibilities. It's important to note that WYO policies must abide by guidelines laid down by the NFIP. Since it has to adhere to the provisions of the NFIP, coverage in theory remains more-or-less consistent regardless of issuer. Aside from WYO policies, another significant role for private insurers is the widespread issuance of policies to cover claims in excess of NFIP limits (Excess Flood Insurance). In addition, a few private insurers have begun to offer direct flood insurance policies that are not part of the NFIP, but this remains a small and untested market.

Becoming an NFIP Agent Writing a Policy In What Zone (A, V, B, C or X) is the Property Located?

Flood Insurance rates as well as whether a property is required to be insured rely heavily on the risk assessment placed on the property in the FIRM currently in force. It's vital to advise a customer of the flood risk zone where the property is located and the meaning of this assessment. Old school insurance agents had to pull out a box of maps and look for the area of the address to determine the flood zone. Now agents enter the address through a computer onto a website. FEMA has a tool to search for the current flood risk assessment on individual properties (FEMA Flood Map). Printed maps and other tools for reading a FIRM are also available. It is important to emphasize that a FIRM can be revised at any time. The NFIP began a program in 2003 to systematically update the FIRMs. FEMA has a search feature to determine when your area is due to have the FIRM updated. If the property is moved to a lower risk rating, the premium may be significantly decreased or the owner may opt to suspend flood insurance altogether. If the property is reassessed into an SFHA the need for and cost of insurance may change significantly, although waivers through the PRP program can be obtained to delay rate increases.

Errors, Omissions, Ethics, and Best Practices Homeowners, Renters, and Commercial Clients Commercial Properties

Flood insurance coverage is even more strongly advised for commercial properties that may be exposed to flood risk than to homeowners. FEMA statistics suggest that one in four businesses that shut down as a result of flooding never reopen. Like renters, businesses are more often located at lower elevations so are often at greater risk of flooding. Some businesses are historically located along waterways, heightening risk. As with homeowner's policies, business clients must be warned that a basic policy will not cover them in the event of a flood. In addition to direct damage from a flood, inventory and losses to contents for a business can be considerable. Loss of use can be devastating to a business. Prudent business practices would be to obtain flood insurance coverage if risk of flooding exists to any significant degree. Excess flood insurance (EFI) for homeowners was discussed, above. Commercial properties are more likely to benefit from EFI than homeowners. Another form of excess coverage is known as "Difference in Conditions" (DIC) insurance. This form of coverage is available only through Surplus Lines carriers to commercial clients. It carries a very high deductible so may work like EFI whereby it covers losses above NFIP limits (i.e., the deductible would be equal to the NFIP limit). Some businesses may rely only on DIC insurance in lieu of NFIP coverage, taking on the high deductible in the event of a flood. The premiums tend to be significantly higher than those for EFI. DIC insurance also generally covers lost income, which is not covered in NFIP policies. DIC policies are generally written to apply to the specific insured so its provisions must be reviewed carefully (for example, are only floods from bodies of water overflowing covered but not surface water flooding).

Flood Insurance: Yesterday, Today, & Tomorrow Flood Insurance Down Through the Ages (until 1968)

Floods have provoked major human responses throughout recorded time. Our modern calendar exists because, 5,000 years ago, Egyptians needed a way to predict and take measures against the annual flooding of the Nile. Risk management and flood control have been associated ever since. Despite this long history, flood insurance, itself, has nonetheless been haphazard. For most of the history of the United States it was undertaken entirely by private companies. The first direct response to homeowners' losses by the U.S. government occurred in 1934 in the form of low-interest loans to flood victims. Government response to floods remained mainly focused on flood control and prevention measures (levees, etc.) until the Disaster Relief Act of 1950 provided a regular source of federal funds for floods or other disasters. It had limited application, was invoked only by Presidential response to specific, large-scale events, and was unfunded except by general income taxes. The Federal Flood Insurance Act of 1956 was the first attempt to make coverage available for all homeowners, but the lack of actuarial data resulted in delays then abandonment of the program. The U.S. government was seeking to respond to the problem flood insurance presents for private companies in that, compared to the risks of relatively frequent events such as fires (where there is ample data and statistical modeling) the risks of low-probability/high-loss events like floods are hard to calculate. In addition, the massive costs and compressed time of even a single event would require large reserves on the part of private insurers to remain solvent in the event of a widespread disaster. Meanwhile, property owners with more expensive and higher-risk properties tend to be the only ones to buy insurance while less-well-off people with fewer assets and those not at high risk do not. This process, known as "adverse selection," causes higher premiums for those who insure, which in turn forces still more customers from the market, causing ever-increasing premiums, until no one can afford to insure. As a result of these factors, during the 1950s and early 1960s whatever scarce flood insurance that had been available from private insurers ceased to exist. After Hurricane Betsy struck Louisiana in 1965, it became clear that, in the absence of private flood insurance, a comprehensive, reliable, and proactive national approach was required.

Errors, Omissions, Ethics, and Best Practices Homeowners, Renters, and Commercial Clients

Homeowners, renters and commercial clients have different needs with regard to flood insurance, although there are obvious similarities, as well.

Errors, Omissions, Ethics, and Best Practices High-Risk Flood Areas

If the property to be insured is (or might be) in an "A" (floodplain) or "V" (coastal) high-risk area you are obligated to advise your client about flood insurance. A property owner in a high-risk area is not required to obtain flood insurance. By law, federally regulated or insured lenders must require flood insurance in high-risk areas for property on which they have issued a loan. It's therefore up to a loan issuer who provides a government-backed loan to require and retain proof of flood insurance coverage. If the bank doesn't require flood insurance or the property has no mortgage liability, flood insurance is optional (but recommended). If an owner doesn't purchase flood insurance for a mortgaged property in a high-risk zone, a lender can "force-place" a flood insurance policy on property. "Force-place" means the lender will buy a policy and bill the owner for it. Such policies typically costs significantly more than the policy the owner could have purchased on their own. Private flood insurance outside the NFIP is available. The 2012 Biggert-Waters Act amended statutes such that lenders are now required to accept non-NFIP policies when issuing loans to "A" or "V" risk homes. As an insurance provider, you should advise the owner that privately underwritten flood insurance is not commonly available and lacking some protections. For example, in the event of a cascade of claims, the company could go bankrupt and fail to honor policies with no government back-up to pay claims. Flood risk maps are subject to change. A property originally in a high-risk area can be redrawn into a low-to-moderate risk area and a property outside a previously charted flood plain can be redrawn into a high-risk area. If a property is redrawn into a high-risk area there are waivers available to delay premium increases for up to two years. According to the NFIP, "FEMA is introducing cost saving insurance options through the NFIP that may benefit property owners. If a building has been newly mapped into a high-risk flood zone, the property owner may be eligible for significant savings with the NFIP's new Preferred Risk Policy Extension. While the PRP Extension option provides temporary relief, revisions to the NFIP's grandfather rules will offer a more permanent premium reduction." Remind owners and renters that flood risk assessments are estimates based on the best available information. There is no guarantee that actual risk will accord with estimates. These are actuarial tables used to calculate premiums and not intended as a predictor of events. Any property and contents with a value significantly above the limits set by the NFIP should consider Excess Flood Insurance (EFI). As mentioned earlier, the NFIP offers up to $250,000 structural coverage and $100,000 to cover contents for residential properties and $500,000 with an option of $500,000 for contents of commercial properties. The main role of private underwriters in flood insurance has historically been to offer EFI policies that take effect only in the event of valid claims that exceed the NFIP limits. Naturally, such EFI policies also require that maximal NFIP coverage be maintained for the additional policies to be valid. The lowest determination of "high-risk" is called a "100-year floodplain." To put this assessment in perspective, this translates to a 1 in 4 chance of being flooded during a 30-year mortgage. The risk during a 30-year mortgage is 27 times as great with regard to a flood than a fire.

Becoming an NFIP Agent Additional Training

In addition to the initial three-hour training requirement before being licensed to sell flood insurance, the NFIP requires a two-hour continuing education class in order to be eligible for the FloodSmart Agent Referral Program. This referral program is maintained by the NFIP, including contact information for agents in the referral program, organized by location, as well as subsidizing some advertising of services. The NFIP offers training programs for adjusters to meet the requirement of national flood insurance and for lenders who want to learn how to handle flood insurance requirements for mortgages. In addition, private programs have been established that offer certifications that are not specifically endorsed by the NFIP nor do these trainings qualify those who hold the certification with any special access to the NFIP or to flood insurance as it's offered by either private companies or by the national program. One example is the Associate in National Flood Insurance (ANFI) offered by one independent company. Agents who earn qualifications separate from those issued through the NFIP may use them in their advertisements. These qualifications, however, are unnecessary for handling flood insurance in any capacity. Finally, continuing education in flood insurance is available as an option for meeting requirements for continuing education certification as a licensed provider of P&C Insurance.

Flood Insurance: Yesterday, Today, & Tomorrow Biggert-Waters Flood Insurance Reform Act

In recent years, strenuous concerns have been raised that the NFIP had become insolvent. Among the concerns are that premiums remain artificially low, maps don't accurately reflect risk or aren't recently updated, loopholes are widely used to avoid paying for the true level of risk or adopting mitigation measures, and flooding events are becoming more frequent and more severe than anticipated in the actuarial models. One article on this subject summed it up: "the National Flood Insurance Fund has never charged premiums high enough to build a reserve for catastrophic flooding. Indeed, Hurricane Katrina claims could be and were paid by the NFIP only with borrowed money, and in the aftermath of the flooding Congress was forced to increase the statutory cap on how much the NFIP could borrow from $1.5 billion to $20.775 billion. It is generally understood by Congress that the NFIP will never be able to repay this debt, which now stands at over $17,000,000,000." Repeated claims from the same claimant also have been criticized. As Craig Fugate (FEMA Administrator since May 2009) stated, for example, "The moral hazard of subsidizing [flood] risk is, we're going to rebuild right where we were, just the way it was, and we're going to get wiped out." The ability of the NFIP to respond to risk by raising premiums had also been restricted by Congress in the late 1980's in response to actions by the Reagan Administration to more than double some premiums in an attempt to enhance solvency. In July 2012, Congress passed the bipartisan Biggert-Waters Flood Insurance Reform Act (named for co-sponsors Judy Biggert, R-Illinois and Maxine Waters, D-California) by a wide margin. The law instituted profound changes during the five-year period it would be in effect. Structures outside high-risk zones were unaffected but those within the zones were almost all affected. Only intact primary residences in high flood risk areas that had been continuously insured since before flood maps were implemented would retain subsidized rates. Buildings that had been improved, sustained flooding, had been recently sold, were a second residence, or were used for commercial purposes would have rates rise by a maximum of 25% annually until they reflected true risk rates. Additionally, structures previously mapped outside high risk areas but since mapped into areas of higher flood risk would now be required to have flood insurance (a program to temporarily delay an increase in the premiums for these properties was included).

Errors, Omissions, Ethics, and Best Practices Homeowners, Renters, and Commercial Clients Homeowners

Many homeowners are unaware of the need for flood insurance or the options available. When seeking to purchase a home, they need to be advised that flood peril is not covered in their Homeowners Insurance policy. They need to be advised of the cost and advisability of a separate flood insurance policy and that, if they are flooded, they would only be bailed out by flood insurance or, in the absence of insurance, government help in the form of a loan, not a direct payment; in essence, a second mortgage. The variable need for and cost of flood insurance at different locations may affect a prospective homeowner's decision to buy or a current homeowner's decision to sell a home. It needs to be a factor in how you advise a client. They can also be advised of alterations to a home that can reduce premiums; they can judge how many years of savings on premiums it would take to render alterations prudent. Homeowners may not be aware of the damage to irreplaceable items a flood can cause nor the cost of clean-up and repair after any flood. When given adequate information, a homeowner may opt for more coverage or to undertake flood prevention efforts that will substantially reduce their exposure.

Flood Insurance and the Role of an Insurance Producer The Standard Flood Hazard Determination Form Mudslides, Mudflows, and Other Flooding Perils

Neither mudslides nor mudflows are covered by standard P&C insurance policies. A mudslide is a movement of water-saturated earth downhill. Since it is a movement of earth, it is considered a peril similar to earthquakes or sinkholes and is excluded from any named-perils policy. Coverage for mudslides can be added as an endorsement to a standard P&C policy that covers the peril of earth movements. The nonprofit Insurance Information Institute states, "It is best that a homeowner be wary of living in an area prone to mudslides." No NFIP policy covers mudslides. A mudflow is a runny, watery stream of mud. It is characterized by sediment borne by water in a manner similar to the flowing of water; it can move easily over level or even slightly inclined land, unlike a mudslide. A mudflow is considered a form of flooding and is covered by any NFIP policy but not by any endorsements offered to private insurance. Mudflows are more likely in the wake of a fire or any devastation of ground cover followed by a heavy rain or snow melt. Mudflows are much harder to predict than mudslides because they can be triggered by heavy rain, melting snow, and other weather events that aren't tracked by geological surveys or that can occur spontaneously. [Note: in contrast to mudslides, there is no Insurance Information Institute advisory to being wary about locating a structure near mudflows, since a mudflow is not a predictable geological event]. Floods are not always a result of natural disasters. The failure of a dam can cause flooding with scant advance warning. FEMA estimates that at least 2,000 dams nationwide have deteriorated enough to present a risk of failure. This potential danger is not reflected in risk hazard maps or FIRMs and can affect homes and businesses in mild-to-moderate risk areas. Flash floods can also occur in zones not listed as at high risk of floods if rainfall overwhelms storm drains or other mitigation efforts.

Errors, Omissions, Ethics, and Best Practices How to help a client obtain lower rates

Rates and policies regarding claims for government-backed flood insurance are set by the NFIP. Comparison shopping for basic flood insurance through the NFIP does not exist. Premiums for basic flood insurance reflect the limits you place on coverage, the deductible chosen, and whether your community participates in the Community Rating System (CRS). Care needs to be taken if trying to achieve savings by reducing the limits on coverage. The NFIP allows for coverage for the full value of a total loss only if the policy is written to cover at least 80% of assessed property value. Since the usual requirement for Flood Insurance on a mortgaged property is to have coverage sufficient to pay off the balance of the loan, the limit on the policy can be (and often is) considerably less than the replacement cost for the actual structure. Additional savings can be achieved if the owner renovates, relocates, or modifies a structure to increase its ground elevation, but these alterations can be expensive if not undertaken as a part of repairs in the aftermath of flood damage. Properties that have been redrawn into a high-risk flood zone can also achieve savings by applying for an extension to their Preferred Risk Plan (PRP) coverage. This won't affect the coverage offered. Private insurance that competes with the NFIP exist in a few locations. These policies, if available in your community, should be assessed carefully before recommending them to a client. Unlike basic flood insurance, rates and policies for Excess Flood Insurance can vary widely. Most are highly affordable. Renters Flood Insurance is also affordable. The PRP rate for Renters is $68 a year.

Case Law

Since the losses for flood damage can be considerable but coverage limited and gaps in coverage widespread, there has been considerable litigation with regard to flood insurance.

Case Law Technicalities

Some claimants have brought legal actions when their claims are denied based on a failure to meet technical requirements. Most often, these denials on technical grounds have been based on the claimant's failure to file a "Proof of Loss" for damages resulting from a flood. The Courts have uniformly upheld denials based on failure to meet the technical requirements of the NFIP.

Errors, Omissions, Ethics, and Best Practices

The most common action filed against an insurer is when a flood-damaged property was not in a Special Flood Hazard Area and therefore the producer did nothing to insure against floods. Many insurance producers construe a question as to whether an insured "has to have" flood insurance to mean "do I have a legal requirement to have flood insurance?" - and say "no." Since the mandate to file a "Standard Hazard Determination Form" is limited to properties in an SFHA, this may lead both insurance agents and property owners to think that, when a property is not in a high-risk flood area, flooding and flood insurance need not be of concern. Best practices suggest otherwise. Most state insurance regulations recommend that, when an insurance producer is either selling or renewing a home insurance policy, it is prudent to advise the applicant of the availability of flood insurance through the NFIP. If, after being advised of the availability of flood insurance, the applicant declines the coverage, it is advisable for the producer to have the applicant sign or initial a statement indicating that the applicant was advised of the availability of the coverage but declined to purchase it. This statement should be retained in the producer's file on the applicant. The other most common action against an insurer is for failure to advise a client to purchase enough insurance to cover damages. Either obtain an NFIP policy at a high enough level to cover a property, its contents, and the loss of use, or seek additional coverage. A client who is advised to seek additional coverage and chooses not to do so should have that decision documented as well. Ethics and best practices suggest that the role of an insurance producer is to advise clients of the best ways to make flood insurance affordable through well-chosen deductibles, flood mitigation efforts, PRP, incentives and waivers, etc. It is also the role of producer to provide advice and counsel on the availability of basic and excess coverage, and the meaning of flood risk assessments. An informed customer in a low-to-moderate flood risk area can make his or her own assessment of risks and benefits. Don't make the assessment for them; neither instruct them to purchase nor to forego flood insurance. In contrast, a customer in a high flood risk area should be advised to obtain flood insurance, if possible, regardless of whether they have a mortgage. Any customer who comes in your door is going to expect you to be able to tell them if their property is at substantial risk of flooding of any kind. They have a right to expect you to warn them that no standard private insurance will cover them in the event of a flood. You need to be able to guide them through the process of flood risk assessment, evaluating and obtaining coverage, and ensuring the coverage is right for them. Familiarity with the tools used in flood risk assessment and the issues and options for insuring homes against floods is needed by every insurance producer who deals in Property & Casualty coverage. The National Flood Insurance Program and FEMA websites provide lots of information and tools needed to help your customers. Also be aware of local developments, private insurance options, and the special needs of your clients. Providing coverage for floods is challenging but critical in a world where sudden extreme events can devastate a home or business.

Flood Insurance: Yesterday, Today, & Tomorrow Homeowner Flood Insurance Affordability Act (HFIAA) Refunds

The new law mandates refunds of excess premiums some policyholders were charged pursuant to the BW-12. Policyholders in high-risk areas who were required to pay their full-risk rate (if it's higher than previously set subsidized rates) after purchasing a new flood insurance policy on or after July 6, 2012 or policyholders who renewed their policy after the Homeowner Flood Insurance Affordability Act was enacted on March 21, 2014 and whose premium increased more than 18 percent will receive prompt refunds. Other policyholders who don't fall under the exemptions, listed above, may receive refunds once a six-to-eight month window during which FEMA will work with the WYO insurers to set up rate review and refund procedures. Policyholders who saw usual, annual rate increases in 2013 or 2014, or policyholders who paid the 5 percent fee, as required by BW-12, for the NFIP Reserve Fund, will only see a refund if their premium renewal was after March 21, 2014 and their total premium, including the reserve fund, exceeded 18 percent.