Understanding Flood Insurance: The United States

This article is a part of a series on flood insurance options. Read the intro and meet Mr. Watersedge here.

In the United States, the National Flood Insurance Program (NFIP) is operated by the Federal Emergency Management Agency (FEMA). The NFIP works closely with private insurance companies to provide affordable flood insurance to homeowners, renters, and business owners. The NFIP also expends considerable efforts encouraging jurisdictions and individuals to adopt flood management practices to limit the extent of future property damages caused by flooding. This includes encouraging more regulations aimed at improving community resilience. Overall, the NFIP reduces the damaging impact of flooding by promoting the purchase of general risk insurance and flood insurance[1]

 

How does the United States’ NFIP work? 

In order to qualify for flood insurance, a home or business seeking insurance must be in a community that has joined the NFIP and agreed to enforce floodplain management standards to further reduce the impact of flooding. Luckily for Mr. Watersedge his community is part of the NFIP and is eligible for flood insurance. Because Mr. Watersedge owns a home covered by the NFIP, he can purchase flood insurance through insurance agents that specialize in private property or casualty policies. Rates are set nationally and do not differ from company to company or agent to agent[2]

 NFIP flood insurance protects two kinds of property: buildings and contents (possessions). Neither covers the land they occupy. Building coverage includes: 

  • Insured building and its foundation 
  • Electrical and plumbing system
  • Air conditioners 
  • Furnaces and water heaters 
  • Refrigerators 
  • Cooking stoves 
  • Built-in appliances such as dishwashers, and
  • Permanently installed carpet over unfinished flooring. 

 Contents coverage includes: 

  • Clothing furniture and electronic equipment 
  • Curtains
  • Portable window and air conditioners
  • Portable microwaves and dishwashers
  • Carpets not included in property coverage, and
  • Clothing washers and dryers. 

 Taking into account Mr. Watersedge’s circumstances and experience with flooding from the Flash River, the NFIP is a good option because the majority of his basement contents would be covered. Also, the tenant renting the basement suite of Mr. Watersedge home would be included in the insurance coverage. 

What are some short-comings in the NFIP approach? 

The NFIP provides up to $250,000 in insurance to protect homeowners and businesses from the high costs of flood damage. In the case of Mr. Watersedge, his Command Chair and Platform from the USS Enterprise of Star Trek: The Original Series is worth more than the $250,000 limit and will not be covered by flood insurance. 

In addition to this shortcoming, there are other recommended reforms that may improve its usability[3]

  • NFIP should increase the risk community size as more people are impacted by floods in greater geographic areas.
  • Communities at risk of flood should interface with the private insurance industry more to reduce the federal government’s involvement and exposure. 
  • NFIP should adopt improved and advanced technologies to streamline applications, risk assessments, and the claims process. 

Amongst insurance providers in the United States there are concerns that, if FEMA does not implement basic changes and updates to the NFIP, then coverage for future flood events could become limited.

What are the opportunities in using an NFIP approach? 

The NFIP provides individuals and businesses up to $250,000 in flood insurance even if they are renting or own commercial property. This is good news for Mr. Watersedge because he rents his basement. Furthermore, by making other smaller improvements to the NFIP, competition with the private flood insurance market would provide users with more affordable options to meet their insurance needs[4].  

 

Sources:

[1] “The National Flood Insurance Program.” FEMA. https://www.fema.gov/national-flood-insurance-program 

[2] “The NFIP Partnership.” Flood Smart. https://www.floodsmart.gov/floodsmart/pages/about/nfip_partnership.jsp 

[3] Zaffino, Peter. “The Climate Risk No One Is Talking About.” Fortune. Published December 15, 2015. https://www.marsh.com/us/insights/the-climate-risk-no-one-is-talking-about-flood.html 

[4] Bronson, Caitlin. “The dramatic changes you could see in the flood market.” Insurance Business America. http://www.ibamag.com/news/catastrophe/the-dramatic-changes-you-could-see-in-the-flood-insurance-market-27122.aspx