Though floods can bring walls of water 20 feet high, even a few inches of water can cause thousands of dollars in damage. Between 2007 and 2011, the average flood claim fielded by the National Flood Insurance Program was nearly $30,000. The cost of the typical flood policy is about $625 a year.
According to the Federal Emergency Management Agency, which operates the flood insurance program, flooding occurs practically every day, practically everywhere. And it is costly, racking up $2.9 billion in losses between 2002 and 2011.
Flooding is the nation's most common natural disaster. About 90% of all disasters in the U.S. involve flooding, and flash floods happen in all 50 states.
In areas prone to flooding, there is a 26% chance a homeowner will be hit by a flood of some kind at least once during the life of a 30-year mortgage. And flood damage can just as easily result from overburdened or clogged drainage systems and drainage from new development as from major storms.
"New roads and housing developments reduce the land's natural ability to absorb water," says The Woodlands, Texas, insurance agent Gordy Bunch. "Runoff can multiply as much as six times when the land is paved over."
Just because a house lies in the 100-year flood plain doesn't mean it is safe for the next so many years, either. That's a common misconception that lulls people into a false sense of security, says Bunch, whose agency, The Woodlands Financial Group, has been recognized by FEMA for its work with flood insurance.
"The 100-year flood plain simply means your home or business has a 1% chance of flooding every year," the insurance pro says, "not once in every 100 years."
Another common misunderstanding about flood coverage, particularly among new homeowners, is that standard homeowner policies cover homes for flood damage. They do not. So if their home is damaged by a hurricane, tropical storm or even heavy rains, they are not covered unless they have a separate flood policy.
Every inch of the country is mapped into one of two risk-based flood zones. By law, federally regulated and insured lenders must require flood coverage on properties in high-risk areas, where there's a 1% or greater chance of flooding in any given year. Lenders must tell you whether the property is in a high- or low-risk area.
Lenders typically do not require coverage on properties in low- to moderate-risk areas. But coverage is still recommended; one-in-five claims come from folks outside a high-risk zone.
Fortunately, everyone—even renters and business owners—can buy a flood policy. The lone caveat is that the property must be in a community that participates in the NFIP, which Congress created in 1968 to fill a void in coverage that most private companies would not offer. About 20,000 communities participate.
There's no need to shop for flood insurance. The NFIP sets all the rates, which factor in location, structure type and whether the property has a basement. But rates are rising.
Under 2012 legislation that reauthorized and reformed the underfunded program, owners who have paid subsidized rates for second homes, business properties and properties that have incurred repeated and severe losses must now pay the full actuarial cost of the insurance. Rates for these properties will increase by no more than 25% a year until the premium meets the full cost.
Rates that other policyholders pay are rising, too. The bill raised the ceiling on premium rate increases from 10% to 20%. And it requires that premiums on new policies for properties not currently covered be based on actuarial rates.
According to the new law, premiums on any property located within an NFIP-participating area must accurately reflect the current risk of flooding. But that determination won't be made until the effective date of any revised or updated flood insurance rate map.
Also, any increase in the risk premium will be phased in over five years, at a rate of 20% a year. Ditto for properties located in an area not previously designated as one with special flood hazards; the premium will be phased in over five years at 20% per year, following the effective date of the remapping.
While last summer's legislation calls for higher rates, it allows policyholders who are not required by their lenders to have their premiums escrowed every month to accept payment in installments. Previously, a single annual premium was required.
Borrowers affected should be aware: Federal disaster assistance is typically in the form of a loan. A $50,000 loan at 4% a year will run $240 a month for 30 years. At the same time, a $100,000 flood policy costs about $33 a month.
Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance-industry publications. Readers can contact him at firstname.lastname@example.org.