Flood Programs and Private Options

The National Flood Insurance Program and the Legal Definition of Flood

Standard ISO homeowners, dwelling, and commercial property forms generally exclude flood, but coverage may be available through a separate policy or endorsement; insurers may also use their own forms and endorsements. To address this exposure, Congress created the National Flood Insurance Program through the National Flood Insurance Act of 1968. Today, the Federal Emergency Management Agency (FEMA) administers the National Flood Insurance Program. Through this federal framework, property owners, renters, and commercial enterprises can secure financial protection against flood-related losses.

Under the National Flood Insurance Program, a flood has a precise contractual definition. An NFIP flood is a general and temporary condition in which normally dry land is partially or completely covered by water or mudflow, subject to the policy's area and cause requirements. To satisfy the area requirement, the inundation must affect either two or more acres of normally dry land, or two or more properties, at least one of which is the insured property. If water affects only your property and covers less than two acres of normally dry land, it does not meet the NFIP policy definition of a flood.

The NFIP defines specific water-related occurrences that qualify as a flood. Qualifying flood events include the overflow of inland or tidal waters, as well as the unusual and rapid accumulation or runoff of surface waters from any source. A qualifying flood also includes mudflow, which the policy specifically defines as a river of liquid and flowing mud on the surface of normally dry land areas. Additionally, the collapse or subsidence of land along the shore of a lake or other body of water can qualify as an NFIP flood when waves or currents exceed anticipated cyclical levels and cause flooding as defined by the policy.

It is equally important to understand what the NFIP excludes. The policy specifically excludes landslides, slope failures, and earth movements other than qualifying mudflows. Furthermore, NFIP coverage excludes sewer or drain backup unless a covered flood in the area directly causes the backup. Finally, the program does not cover damage caused by moisture, mildew, or mold that the insured had the opportunity to avoid. For example, if floodwaters recede and you neglect to begin drying the property, any resulting mold damage that you had the opportunity to prevent will be excluded.

Community Participation and Program Phases

A property owner cannot purchase NFIP flood insurance simply because they desire coverage. A community must apply for participation and agree to enforce local floodplain management ordinances before residents can purchase NFIP coverage. If a community does not participate in the NFIP, residents cannot purchase federal flood insurance. In a nonparticipating community, federal restrictions can also limit certain flood-related disaster assistance and federally backed financing for property located in a special flood hazard area. Once a community chooses to participate, property owners, renters, and business owners can purchase eligible NFIP coverage for property in that participating community, including property located outside a special flood hazard area.

The NFIP operates in two distinct phases called the Emergency Program and the Regular Program. A community may initially participate under the Emergency Program before detailed flood mapping is completed. Under the Emergency Program, property owners can purchase limited amounts of NFIP coverage, subject to NFIP rating rules. This program phase ensures basic protection is available while comprehensive engineering studies take place.

A community enters the Regular Program when detailed flood mapping takes effect and the community meets the applicable NFIP floodplain management requirements. Under the Regular Program, significantly higher statutory limits of flood insurance coverage become available to property owners. Renters in participating communities can also purchase NFIP contents-only coverage under either phase to protect their personal belongings without insuring the physical structure.

Policy Forms, Coverage Terms, and Loss Settlement

The NFIP delivers coverage using standardized contracts known as the Standard Flood Insurance Policy forms. These include the Dwelling Form, the General Property Form, and the Residential Condominium Building Association Policy. The NFIP Dwelling Form covers eligible one-to-four-family residential buildings, individual residential condominium units, and qualifying residential manufactured homes. The NFIP General Property Form covers eligible nonresidential buildings and residential buildings with five or more units, except buildings insured under the Residential Condominium Building Association Policy. The Residential Condominium Building Association Policy covers eligible residential condominium association buildings and covered building elements, subject to policy exclusions.

You can purchase NFIP building coverage, contents coverage, or both. They are separate coverage parts with separate premiums. Because they are distinct coverages, NFIP policies apply separate deductibles to the building and to personal property contents. The policy deductible under the NFIP applies separately to each flood loss occurrence. If a single flood event damages both your building and your personal property, the building deductible applies to the building claim and the contents deductible applies to the contents claim.

Loss settlement provisions vary by the property insured. NFIP policies settle personal property contents losses on an actual cash value basis. Under the NFIP Dwelling Form, replacement cost settlement generally applies to a single-family building that is your principal residence if its building coverage equals at least 80 percent of its replacement cost or the maximum NFIP building limit available. NFIP building losses that do not qualify for replacement cost settlement under the Dwelling Form are generally settled at actual cash value, while the condominium association form has different loss settlement rules.

The NFIP defines a basement as any area of a building having its floor subgrade or below ground level on all sides. Coverage in basements is strictly limited. NFIP basement coverage includes certain building components and essential equipment, as well as specified contents such as clothes washers, dryers, and food freezers. However, NFIP coverage generally excludes finished basement walls, floors, and ceilings, as well as most personal belongings stored in a basement. The NFIP excludes many outdoor items, including fences, driveways, patios, swimming pools, septic systems, and decks outside the insured building's perimeter walls; covered detached garages are an exception to the broader rule about structures outside the main building. Furthermore, NFIP policies do not cover additional living expenses or fair rental value losses resulting from flood displacement.

Policy Administration, Waiting Periods, and Private Flood Options

Unlike standard property policies, you cannot bind NFIP coverage as an insurance producer. You must follow strict NFIP application, payment, and effective-date rules, although a private flood insurer may have different binding rules. To prevent property owners from purchasing insurance only when a storm is immediately approaching, NFIP coverage generally has a 30-day waiting period after the application and premium are submitted.

The NFIP provides specific exceptions to the 30-day waiting period. The 30-day waiting period does not apply when flood insurance is purchased in connection with making, increasing, extending, or renewing a mortgage loan. For an eligible mortgage transaction, NFIP coverage can take effect at loan closing if the application and premium meet NFIP submission requirements. A one-day NFIP waiting period can apply to an initial purchase during the 13 months after a revised flood map takes effect when the revision newly places the insured property in a special flood hazard area.

Federal flood policies are distributed through two primary avenues: direct purchase or through the Write-Your-Own program. Under the Write-Your-Own program, private insurance companies write and service NFIP policies under their own corporate names. However, in the Write-Your-Own program, the federal government retains financial underwriting responsibility and sets all policy rates, terms, and coverage rules. The private insurers simply act as fiscal and administrative agents for the federal government.

As an alternative to federal coverage, property owners may purchase private flood insurance. Private flood insurance consists of policies issued and backed entirely by private insurers rather than the federal government. Private flood insurance policies can provide higher coverage limits than the statutory maximum limits offered by the NFIP. Depending on the insurer and policy, private flood insurance may offer options the NFIP does not, such as loss of use, business interruption, or replacement cost coverage for personal property. Private flood policies may also offer shorter waiting periods than the standard 30-day federal waiting period. Federally regulated lenders generally must accept private flood insurance that meets federal regulatory criteria and may accept certain other private policies if applicable requirements are met.