Flood Insurance 101

Flood insurance is a crucial part of managing risk in our community. But how does it apply to you?

What is flood insurance?

Property insurance policies like homeowners insurance don’t usually cover damage resulting from flooding. Flood insurance fills this gap. In the U.S., most available flood insurance policies are provided through the National Flood Insurance Program, or NFIP. The NFIP was created in 1968 as part of a movement to integrate non-structural methods of managing flood risk into U.S. floodplain management systems. Without getting too specific, the NFIP is meant to provide residents like yourself with alternative financial tools to traditional disaster relief funds after flooding events.

NFIP flood insurance policies are unique in the world of insurance in that the federal government sets the rates and backs them. While this is true, you can purchase your flood insurance through private insurance agents, who will also be your points of contact for filing claims.

Flood Insurance

What does flood insurance cover?

There are two main flood insurance coverage types. While policies can get pretty nuanced, here are the main differences:

Building Property: This type of policy covers your physical home from the roof down to the foundations. It also includes anything integrally attached to your house (like cabinets). A useful rule of thumb can be: building property flood insurance covers anything that you wouldn’t take with you during a move. Most detached structures are not included in a building property policy (you’ll need a separate policy for them), but detached garages can be. There are two types of reimbursements possibly under these policies:

  • Replacement cost value (RCV): As the name suggests, RCV allows you to be reimbursed for the cost of replacing your lost property, without depreciation factored in.
  • Actual cash value (ACV): An ACV reimbursement is typically less preferable for property owners as it reimburses you for the depreciated value of your property at the time of your loss.

Let’s take the abstract example of a five year old couch. RCV will give you the amount of money you need to buy a new couch. ACV will factor in the five years and give you the amount of money that your couch was worth when you lost it, which means that to buy a new one you’ll need to make up the difference.

Building property coverage typically covers RCV for primary dwellings, so if you use the property as your primary place of residence you’ll be covered for replacement costs. For vacation homes, ACV is typically used when determining your reimbursement. Building property coverage usually doesn’t cover mold/mildew damage or outdoor property damage (for example, your pool).

Personal Contents: This type of coverage protects the removable stuff inside of your home including furniture, appliances and clothing. It doesn’t cover money, paper valuables, and/or precious metals nor does it cover cars (that’s what your auto insurance is for). Personal contents coverage will give you actual cash value (ACV) for your goods.

Coverage

Generally, residential NFIP policies have a maximum coverage of $250,000 for buildings and $100,000 for personal property. Private insurance is also an option if you want more coverage or terms that are different from those that the NFIP offers.

How is flood insurance priced?

If you have an NFIP flood insurance policy, your premium is set by FEMA. In this case, you won’t get a different price if you shop around to different insurance companies (which can be great or annoying, depending on your circumstances). Generally, in that case your rate is set by combining details about a building (like when it was built, how many floors it has, and the elevation of the lowest floor) with its flood risk and coverage amount. For residents who are currently purchasing flood insurance or who think their premium might be too high, obtaining an Elevation Certificate might help to reduce costs. Check here to see if we have one on record for your property, already. If not, you can contact a surveyor to produce one. If you would like to learn more about Elevation Certificates, this FEMA fact sheet is a good place to start.

The residents of Bay Head also get an automatic discount on flood insurance because our community participates in the Community Rating System. Because the Borough invests in mitigation, we are a Class 6 CRS Community. This means that residents in the Special Flood Hazard Area (SFHA) get a 20% discount on flood insurance!

Lastly, with respect to pricing, you may have heard that changes are being made by the federal government that will affect flood insurance premiums. This FEMA fact sheet discusses some of these legislative shifts.

Do I need flood insurance?

Anyone in an NFIP community (we are one!) can purchase flood insurance, regardless of risk level or mandatory purchase requirements. If your residence is in Bay Head and you want flood insurance, you can (and should) buy it even if you’re not required to.

You’ve probably heard about flood insurance requirements being included with home loans. Depending on the location of a building, flood insurance may be required as a condition for securing a federally-backed loan through your bank as well as grants offered by federal programs. While the idea of flood insurance is relatively straightforward, understanding how and when it is required is a bit more complex.

Here in Bay Head, you must purchase flood insurance in order to receive a federally-backed home loan or federal financial assistance for a property in our Special Flood Hazard Area (SFHA). Learn more about what a SFHA is and how to determine if a property you want to purchase is in one in Bay Head’s Flood Hazards.

Note that only building property flood insurance is required. It’s often misunderstood that mandatory flood insurance purchased as a condition for a loan includes contents coverage. In fact, while building property flood insurance is sometimes required, contents insurance is voluntary. If you want to insure your contents against flood, you’ll have to purchase this in addition.

How do I buy flood insurance?

A local flood insurance agent can help you purchase a policy. You can start with the agent who sold you your homeowners or renters insurance. If they have a flood product, you can purchase it from them. If not, ask them for a referral. FEMA also keeps a list of companies that write flood insurance. You can find it here.

If you purchase an NFIP flood insurance policy, there will be a 30 day waiting period before your insurance policy takes effect. You should factor this into your decision-making around when to purchase flood insurance. Over 80% of the borough’s homeowners carry flood insurance and we advise all Borough residents to purchase a flood insurance policy. If you’re still unsure of its applicability, feel free to contact us.

Have questions?

If you would like to learn more about topics like flood insurance, local flood hazards, or historic floods, we’re here to help. Reach out to speak with your local floodplain expert.

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