Floods, earthquakes, and other acts of nature can be so catastrophic that it is difficult for a normal private insurer to cover these perils without risking its own financial security. This means that homeowners cannot obtain insurance against catastrophic perils such as floods through standard homeowners or dwelling insurance policies.
However, the federal government stepped in several decades ago to help ensure that homeowners can obtain protection against the havoc that can be wreaked by floods. This led to the creation of the National Flood Insurance Program (NFIP) in 1968. NFIP is a government program that acts as an insurer and is managed by the Federal Insurance Administration (FIA), which is itself a branch of the Federal Emergency Management Association (FEMA).
In the past several months, Hurricane Sandy helped illustrate just how devastating hurricanes can be; even though there were few casualties, an extensive amount of property damage was levied by Hurricane Sandy and the resulting floods it caused. Whether you were directly affected by these floods or are just curious about flood insurance, this should serve as a helpful guide to understand some of the basics of this type of coverage.
WHAT DOES FLOOD INSURANCE COVER?
Almost any building fixed to a permanent site that has walls and a roof and is situated above-ground is eligible to be covered by flood insurance, and a flood insurance policy covers buildings and their contents.
However, flood insurance pays for direct losses to buildings and contents caused by events which meet the definition of a ?flood.? It does not cover indirect losses, such as additional living expenses.
For the purposes of flood insurance claims, a ?flood? is defined as any of the following:
??An overflow of inland or tidal waters.
??Unusual and rapid accumulation of runoff and surface water from any source, such as a storm sewer.
??Mudslides caused by water.
??Collapse due to erosion of the ground by water.
Flood insurance can also be obtained by commercial property owners, which covers damage to buildings and their contents, as well as the costs of debris removal and flood prevention measures. However, business income and extra expense coverages, which are normally components of commercial insurance policies, are specifically excluded from flood coverage.
HOW DOES ONE OBTAIN FLOOD INSURANCE?
Rather than people applying individually for flood insurance, entire communities apply for coverage with the NFIP on behalf of everyone living in that area. Once eligibility is confirmed for the community, its individual members can then purchase regular flood coverage (more on that in a bit).
Before a policy goes into effect, the individual wishing to own a flood insurance policy must complete an application, remit full payment for the policy, and allow for a 30-day waiting period. This waiting period prevents consumers from suddenly deciding to purchase a policy when a flood warning is issued.
However, this waiting period is waived in the following situations:
??The insured is making a first-time flood insurance purchase in connection with a loan.
??The previous owner of a property carried the coverage, and the new owner wishes to continue it.
??A community is entering the program for the first time, in which case coverage begins at 12:01 a.m. the day following the application mailing date.
In addition, individuals can obtain emergency flood coverage if forced to wait for their community to be confirmed for regular coverage. An emergency policy goes into effect the day after an application is submitted, and it remains in force until NFIP finalizes rates and coverage for the community.
Emergency flood coverage is limited to $35,000 per building, and $10,000 for contents contained in these buildings. After the FIA sets rates and finalizes a program, additional coverage may be purchased by community members, subject to the increased limits of $250,000 per building and $100,000 for building contents.
HOW DO I KNOW IF I NEED FLOOD INSURANCE?
Communities can apply to participate in the NFIP voluntarily, but they might also be required to participate by the NFIP if located in a flood-prone area.
While coverage might be mandated by the NFIP, it does not have to be purchased directly from this program.? A cooperative effort between the insurance industry and FEMA led to the creation of the write your own program (WYO) in 1983. Under the WYO program, insurance providers have been authorized to write and sell flood insurance policies themselves, while still enjoying certain financial protections from the federal government.
Private insurers who issue WYO policies are permitted to retain a fixed amount of money earned from premiums to cover administration costs, but the rest must go toward paying claims. If the insurer?s losses exceed the amount of money earned in premiums, the FIA steps in to pay the difference. If the insurer?s premiums exceed losses, however, the insurer must turn over the excess income earned to the FIA.
If coverage is not mandated for your community by NFIP, community leaders and insurance brokers can help you decide whether or not to take advantage of flood insurance.
Find out How to Get Your Insurance License here.
About The Author: Nathan Rothwell serves as the lead instructor and subject matter for Insurance License Express, a division of Express Schools, LLC. Since 1996, Express Schools has offered online insurance licensing courses and online real estate courses, as well as online real estate exam prep and insurance license exam prep.
Tags: dwelling, flood, Homeowners, Insurance, perils, Policies, program, sandy
Source: http://www.insurancelicenseexpress.com/blog/index.php/fundamentals-of-flood-insurance/
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