Inundated: The National Flood Insurance System

Image of someone's feet next to a puddle of water with leaves in it. Captioned: Inundated, The National Flood Insurance System

A rainy day is the perfect time for a walk in the woods, Rachel Carson said. But it’s not the best time to live at the base of a downward slope. And while homes built near water are popular and picturesque, buyers longing for a river view are wise to look closely and ask questions about potential water damage.

Floods are increasingly common. And flooding is the costliest of natural disasters in the U.S., according to the Federal Emergency Management Agency. FEMA’s system is being put to the test now, as rising numbers of us live with storms and floods. Can flood insurance keep us protected? Here’s what you need to know.

Put to the Test: FEMA’s Insurance Program

The agency’s National Flood Insurance Program (NFIP) is meant to help people and communities in regions that are statistically flood-prone. According to FEMA, just an inch of flooding can cause more than $25,000 in damage. The standard insurance policies available to most home buyers won’t cover it.

Congress passed the National Flood Insurance Act in 1968. With that law, a federal system was created to cover buildings within the National Flood Insurance Program. FEMA flood insurance is supplied through a network of insurance companies that cover property owners, renters and businesses, with FEMA as underwriter.

Your mortgage company may require flood insurance if you choose a home in a high-risk flood zone. Indeed, it’s up to the lender’s discretion to have a buyer purchase insurance for houses even in low-risk or moderate-risk areas. Lenders consult FEMA’s maps to make these calls, so home shoppers might wish to check specific addresses in the flood maps before looking at a specific home to get an idea. Owners and renters can contact their counties to verify whether a certain address is in a flood zone, and call their insurance companies to ask for applications for FEMA insurance.

Costs and Coverage

FEMA covers up to $250,000 for a one- to four-family building. The coverage includes permanently installed appliances, systems, and floor coverings, and additional coverage can include up to $100,000 for its contents, including personal valuables and moveable appliances.

There are some important restrictions:

  • With few exceptions, there is a 30-day waiting period from the purchase date until the coverage takes effect — although it’s effective immediately when you buy into FEMA’s flood insurance program to obtain a mortgage loan.
  • Coverage in areas below the lowest elevated floor is limited.
  • The policy won’t cover sewer backups not directly caused by floods; nor will it cover documents or currencies, fixtures outside the home, cars, loss of business, temporary housing, or emergency expenses.

Policy premium costs vary from home to home. Weighing into the costs is a property’s market value, and also its vulnerability to floods. So, an insurance agent will start with a flood zone determination for the area. The steepest premiums correlate with the AE (high risk) and the VE (very high risk) zones. Homes in these riskier zones will cost thousands of dollars annually to cover. It is not unheard of to have insurance bills that exceed the monthly mortgage payments.

Premiums also vary by the deductible a homeowner chooses, and whether the owner gets coverage for the structure, its contents, or both. There are discounts in communities that mitigate flood risks. Other ways to qualify for coverage or lower the premiums might include filling in a basement or obtaining an elevation certificate, raising utilities or having flood vents built in a crawl space. FEMA provides a Homeowner’s Guide to Retrofitting to explain an owner’s options.

Owners of especially high-value homes or contents may decide to carry an additional flood rider, given FEMA’s cap on payouts. Some insurers offer personal flood insurance policies that offer homeowners extra protection. In many coastal and hurricane-prone areas you’ll need to get wind insurance too, in addition to regular homeowner’s insurance.

Then there are condos. Island or beachfront condominiums are popular properties. For these multi-unit buildings, which are even more expensive to insure, the homeowners’ association (HOA) covers the structures and the common amenities. Unit owners may have to buy interior insurance coverage for their individual units, though.

Pro tip: Be cautious about buying in a partial flood zone. If your mortgage is sold, the new bank might not apply the same zoning code for your property as the loan originator had, or FEMA may change its flood levels after severe storm damage. Monthly mortgage payments can rise significantly when a property is rezoned. 

FEMA Falls Short

Demand for federal flood insurance is on the rise. This trend is widely attributed to a disrupted climate, which entails warmer air, stronger storms across the continent, harder rains, and rising sea levels.

In theory, there is prompt help for people whose homes bear the brunt. Homes that sustain repeated flooding can receive FEMA support to elevate the house or otherwise mitigate its flood risk. If the issue is common to several properties in one area, federal funding is available to local governments that need to improve their drainage systems.

But in practice, homeowners can wait years for the agency’s response. Recently, the Office of the Inspector General (OIG) came out with some troubling news about severe repetitive loss (SRL) homes. After an audit, the OIG published a report, bluntly titled FEMA Is Not Effectively Administering a Program to Reduce or Eliminate Damage to Severe Repetitive Loss Properties, finding that tens of thousands of people dealing with flood after flood are not getting the help that’s due to them.

Under federal law, FEMA must track and provide federal aid to people whose houses repeatedly flood.

But the new report finds FEMA isn’t keeping up. The OIG also says some holders of FEMA-backed insurance policies have mitigated their flood risks, but not received lower rates. FEMA does not deny its shortcomings, but now must work to correct them. This will take time — especially as many of its flood maps are out-of-date, and do not account for climate change and current rates of sea level rise.

Selling a Flood-Prone House: The Owner’s and Agent’s Duties

Sellers should review the laws in their states on disclosures. States vary widely on having sellers disclose that past flooding has occurred, or that the house requires flood insurance coverage. But whether or not the seller has a legal duty to disclose, buyers will understandably want to know if the home is vulnerable, and if they’ll need to purchase federal flood insurance.

If the seller does have flood insurance, but has mitigated the risk or simply never experienced flooding, the seller would want to let buyers know this. But if flooding is a problem for a home, its price needs to take the buyer’s risk and potential expenses into account.

A seller cannot expect a real estate agent to bypass ethical and legal duties to inform buyers of material facts impacting property values. This means disclosure to the buyer is mandatory, and cannot be a case of buyer beware. Real estate agents must tell buyers about known vulnerabilities. They must explain flood insurance and how to get it. Can an agent be held liable by a buyer for neglecting these duties? The answer is yes. Home buyers can and do bring legal actions against sellers’ real estate agents for failing to disclose their homes’ flood histories.

Given the severity of this issue, will the federal government enact a standard requirement for sellers to disclose to buyers what they know about their homes’ history and flood risks? Some states currently require sellers to complete forms including disclosure of past flooding, flood zone determination, or the seller’s flood insurance status. The time is ripe for such disclosures to become a national standard. 

Meanwhile, sellers should be open about their homes’ histories. Transparency is the best policy.

Photo credit: Eilis Garvey, via Unsplash.