When meteorologists announced a flood watch in the metro Atlanta area on September 21st, I don’t think any of us could have imagined the havoc this flood would wreak. Over just a few short days, we received nearly 20 inches of rain. Water reached the roofs of many houses and submerged many neighborhoods in several feet of water. Sweetwater Creek, which runs just west of the city and is a large tributary to the Chattahoochee River, crested over 8 feet higher than the previous record. It was shocking to see that within a couple hours, the flood watch turned into a disaster area with people stranded at home or work, cars washed away, roads and schools closed and houses damaged beyond repair. When I left for work that morning, there was no water in my backyard. By 3:30 in the afternoon, I could only see the tips of my 3 foot picket fence. I was very fortunate that the water never came close to reaching my house. As I sat glued to the TV that Monday worried about all the people affected, one of the first things that came to my mind was “Wow…I bet most of these homeowners don’t have flood insurance.”
Shortly after the major flooding began, the phone lines were jammed with homeowners panicking and inquiring about their homeowner’s coverage. To their dismay, they were told that standard homeowner’s policies will not cover losses from flooding. There are many different forms of homeowners insurance, but the most common form provides Open Perils coverage on the structure and Broad Form coverage on the contents.
Open Perils coverage means all threats are covered unless they are specifically excluded. This is the most comprehensive form of coverage. Broad Form covers a limited list of named threats. Some of the threats specifically excluded are earth movement, war, neglect, nuclear hazard, ordinance of law and perhaps most importantly, water damage caused by any water that enters the home from outside. Not only does this exclude damage from floods but it also excludes coverage for sewer back-ups since the water entered from outside the structure. It makes no difference whether the water entered above or below ground. The exception from this is if the water entered as the result of some other damage. An example of this would be if a tree fell on your house, put a hole in the roof allowing the rain to come in. Homeowners can insure against some of the excluded threats through endorsements or riders that expand the coverage. Flood insurance can be purchased separately for an additional premium.
While flood insurance is definitely a necessity for some homeowners, it does have some limitations. In order for flood losses to be covered, two or more acres of normally dry land or two or more adjacent properties must be partially or completely flooded. The maximum coverage limit for a residential property is $250,000 for the structure and $100,000 for the contents. Basement improvements such as finished walls, floors, ceilings or personal belongings are not covered. The national average premium for flood insurance is $540 but for those who of us who live in a flood zone, the numbers are dramatically higher (mine is $1300) and FEMA has just announced that rates will soon go up between 8-10%. Flood insurance should be considered by every homeowner. For those living in low to moderate flood risk areas, premiums are only a couple hundred dollars a year which would definitely be worth it if a flood ever hits your area. Just like any other insurance, it is a risk tolerance decision.
Only those who live in a flood zone and receive financing from a federally regulated lending institution are required to carry flood insurance. Flood zones are determined by the Federal Emergency Management Agency (FEMA) based on the 100 year flood standard which means that the flood elevation has a 1% chance of being equaled or exceeded each year. Over a 30 year mortgage, the estimated chance of a flood is about 26% in these areas. According to the U.S. Geological Survey, the recent flood in metro Atlanta was a 500 year flood with only a .2% chance of occurrence in any given year. That being said, the majority of homeowners choose to forgo flood insurance under the assumption that flooding will never affect their home. The truth is, about 25% of all flood insurance claims come from low to moderate flood risk areas.
So why do homeowners policies exclude flooding? When a flood occurs, several homes are generally affected and the losses can be too catastrophic for the private insurance industry. Flood insurance is fraught with adverse selection, meaning the majority of those who buy flood insurance do so because they live in areas at high risk for flooding. For this reason, the government has stepped in and since 1968, the National Flood Insurance Program has made federally backed flood insurance available to property owners who live in eligible communities. Eligible communities are those that pledge to adopt and enforce land use control measures that guide development away from flood prone areas. Many people mistakenly believe that only those who live in flood prone areas are eligible for federally backed flood insurance. The truth is that anyone living in an eligible community can purchase flood insurance.
With the estimated damage in the Atlanta area around 500 million dollars, tragically, many homeowners will find that their home will be a total loss. Times like these remind us all why insurance is so important, even if you don’t think a certain situation will ever happen to you. I guarantee most of these homeowners didn’t think so either.
