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Flood Insurance

Flood Insurance in the US

There are many areas designated in the US as flood hazard areas, generally risk is specified by likelihood of flooding within a given time frame, common time frames are 10,50, 100, 500 years.  Meaning that the land is expected to be submerged by flood waters once within that span of time.  Other areas that are prone to flooding have no official designation.

Flood insurance in the US is not offered through private insurance companies, rather flood insurance is available through a federally administered program.  This program is known as the Nation Flood Insurance Program, it facilitates and helps subsidize the cost of flood insurance – through the contributions of local governments.  This is an artifact of the history of land development.  Clearly it is beneficial to be close to fresh water sources most of the time, however, not surprisingly these areas are most likely to flood.  This has led to a situation where a significant amount of development has occurred in flood prone areas. Rather than moving all of these people and businesses, it has been decided that it is most expeditious to simply support a flood insurance program.

The need for a National Flood Insurance Program arises out of the market forces of flood insurance. Because floods affect a small percentage of people disproportionately the market suffers from ‘adverse selection’ – that is, only those affected commonly by floods would buy the insurance, thus the insurance pool would not be large enough to sufficiently distribute the risk.

In order to be able to get access to flood insurance, your local government (typically by city or county) must participate in the National Flood Insurance Program administered by the federal government. This is done in most cities with flood zones to facilitate the stability of their communities, if they didn’t participate, landowners in the flood zone would be extremely limited in what could be done with their property. Typically this property forms the core or a least 1 of the cores of the city or town.

Flood insurance is generally required by mortgage lenders if a property is located within a flood zone.  Flood insurance is typically more costly than homeowners insurance.

One issue facing home owners within a flood zone, is that the issuance of flood insurance is based on the National Flood Insurance Program which must be extended on a regular basis by the federal government.  As you know, sometimes even simple things can get stalled out in the legislative process.  When this happens with the flood insurance program it can stall the purchase or refinancing of properties within flood zones.

It should also be noted that flood insurance is not covered in regular homeowners insurance.