Chapter 6 Flood Flashcards
Additional Coverages, Extensions & Exclusions
National Flood Insurance Program
Many ins forms cover many perils, but flood is excluded from all of them.
Flood is defined as a general & temporary condition of partial or complete inundation by water of what is normally dry land.
Floods can cause significant property damage. A flood brings water, mud, contaminants, and high pressure into a building, and can result in a building’s total destruction. A flood can destroy a building’s foundations and reshape the land on which a building rests, causing structural damage.
The market for flood insurance among private insurers is characterized by adverse selection. Adverse selection occurs when only those with a high probability of experiencing loss are interested in purchasing insurance.
The devastation floods can cause prompted Congress to act in 1968 to develop a National Flood Insurance Program. Homeowners & Commercial property insurance excludes coverage for damage due to flooding.
FEMA underwrites all flood coverage.
In 1983, private insurers began participating in Write your Own (WYO) program to increase the base and geographic distribution of flood insurance & to improve service and claims handling. A WYO company sells flood policies under its own name, collects premiums, services the PHs, adjusts the claims, and pays the losses, and FEMA reinsures 100% of these losses.
Who needs flood insurance?
FI is America’s most common disaster yet, as we discussed above, it is not covered by most HOI policies. Many people don’t think they need FI because they believe federal disaster assistance will bail them out. But floods are not always declared a federal disaster area.
And even when they are, aid is usually in the form of a loan which must be paid back with interest.
FI, on the other hand, pays for all covered losses, and unlike loans, that money doesn’t have to be paid back.
In Special High Flood Risk Zones, defined by the Flood Disaster Protection Act of 1973, FI is mandatory. If the owner does not purchase a policy for the property, the lender is required to do so and pass the cost along. Even in low risk zones, it is a good idea to purchase FI for the reasons stated above.
Special Flood Hazard Area (SFHA)
A Special Flood Hazard Area is defined as a location having special flood, mudflow, or erosion problems.
Zones are rated by FEMA based on their relative risk of flooding. High risk zones are labeled “A” or on the coast “V.”
Moderate to low risk areas are rated “B, C, and X.”
Special Hazard Zones have Base Flood Elevation assignments which greatly effect insurance rates. The Base Flood Elevation measures the base flood elevation in feet in relation to national benchmark data.
Under the National Flood Insurance Program (NFIP,) individuals & businesses are able to purchase FI at rates subsidized by the federal government.
FEMA determines the risk of flood in various locations across the US. The areas are mapped & assigned a flood risk category. The risk of flood is based on many factors, including past history of flooding and hydraulic and hydrologic studies. In certain risk categories assigned by FEMA, known as Special Flood Hazard areas, HOs and businesses are required to purchase FI if they use federally guaranteed financing for their buildings and property. Many private lenders also require FI as a condition of a loan to businesses and homeowners in the higher risk flood zones, as well.
In order to purchase FI, a community must agree to participate in the National Flood Insurance Program. Any community may participate. The community must then comply with land use and flood control measures. When a community first agrees to participate in the program, limited amounts of FI coverage may be purchased. Once the community meets the program’s flood control standards and a detailed flood risk study is completed, higher limits of insurance are available.
Most FI is purchase directly through the NFIP. All property and casualty agents are eligible to write directly with the NFIP. However, private insurers are offered incentives to provide FI as well. The federal government reinsures the policies issued by private insurers for 100% of the loss. The private insurers sell the policies, collect premiums, process claims & provide servicing of the policies.
Waiting Period / Effective Date
You can purchase FI at any time. There is a 30 day waiting period after you’ve applied & paid the premium before the policy is effective, with the following exceptions:
- If the initial purchase of FI is in connection with the making, increasing, extending or renewing of a loan, there is no waiting period. The coverage becomes effective at the time of the loan, provided application and payment of premiums is made at or prior to loan closing.
- If the initial purchase of FI is made during the 13-month period following the effective date of a revised flood map for a community, there is a one-day waiting period. This only applies where the Flood Insurance Rate Map (FIRM) is revised to show the building to be in a SFHA when it had not been in an SFHA. The policy does not cover a “loss in progress,” defined by the NFIP as a loss occurring as of 12:01am on the first day of the policy term. In addition, you cannot increase the amount of coverage you have during a loss in progress.
Policy Term & Cancellations
The policy term for NFIP policies is one year. A Standard FI PH whose property has been determined to not be in a special hazard area after the map revision of a Letter of Map Amendment under part 70 of this subchapter may cancel the policy within the current policy year.
A standard FI PH may cancel a policy having a term of three years on an anniversary date, where the reason for the cancellation is that a policy of FI has been obtained or is being obtained in substitution for the NFIP policy and the NFIP obtains a written concurrence in the cancellation from any mortgage of which the NFIP has actual notice, or the OH has eliminated the mortgage debt and is no longer required by the mortgagee to maintain coverage. In such event, the premium refund shall be pro rata but with retention if the expense constant.
The Flood Policy has 4 sections:
- Dwelling - the main structure and dwelling extensions and additions to the building are covered. The 10% structure coverage limit automatically applies to flood policies.
- Contents - personal property is covered under the flood policy. Personal property must be contained in a fully enclosed building on the residence premises or secured against floating out of a partially enclosed building in order for the coverage to apply.
- Debris Removal - pays for all reasonable incurred expenses and the PH’s labor to remove debris that was caused by the flood. This includes removing debris that floats onto the insured location and to debris of insured property that has floated onto other properties.
- Increased Cost of Compliance (ICC) - provides coverage up to $30k to do one of the following things:
- The reasonable cost to demolish your home.
- The reasonable cost to elevate your home.
In order for ICC to apply, the dwelling has to be substantially damaged; 51% or more destroyed.
Two Types of Flood Insurance Coverage
Flood insurance protects two types of insurable property: building and contents.
The first covers your building, the latter covers your possessions; neither covers the land they occupy.
The NFIPs Dwelling Form offers coverage for:
1. Building/Structure Property, up to $250k
2. Personal Property (contents), up to $100k
Building/Structure coverage includes:
- The insured building & its foundation;
- The electrical & plumbing system;
- Central air condition equipment, furnaces, and water heaters;
- Refrigerators, cooking stoves, and built-in appliances such as dishwashers;
- Permanently installed carpeting over unfinished flooring.
Personal Property/Contents coverage includes:
- Clothing, furniture, and electronic equipment;
- Curtains;
- Portable and window air conditioning units;
- Portable microwaves & dishwashers;
- Carpeting that is not attached to the building;
- Washers, dryers.
What is not covered by either FI coverage:
1. Personal property not inside a fully enclosed building;
2. A building, and personal property in it, located entirely in, on, or over water;
3. Personal property located in, on, or over water;
4. Recreational vehicles other than travel trailers, whether affixed to a permanent foundation or on wheels;
5. Self-propelled vehicles or machines, including their parts and equipment. However, we do cover self-propelled vehicles or machines not licensed for use on public roads that are:
- used mainly to service the described location.
- designed and used to assist handicapped persons, while the vehicles or machines are inside a building at the described location.
6. Land, land values, lawns, trees, shrubs, plants, crops, or animals;
7. Accounts, bills, coins, currency, deeds, evidences of debt, medals, money, stored value cards, postage stamps, securities, bullion, manuscripts, or other valuable papers;
8. Underground structures and equipment, including wells, septic tanks, and septic systems;
9. Walkways, decks, driveways, patios, and other surfaces, all whether protected by a roof or not, located outside the perimeter, exterior walls of the insured building or the building in which the insured unit is located;
10. Containers, including related equipment, such as but not limited to, tanks containing gases or liquids;
11. Buildings or units and their contents if more than 49% of the actual cash value of the building or unit is below ground, unless the lowest level is at or above the base flood elevation and is below ground by reason of earth having been used as insulation material;
12. Fences, retaining walls, seawalls, bulkheads, piers, bridges, and docks;
13. Aircraft or watercraft, or their furnishings and equipment;
14. Hot tubs and spas that are not bathroom fixtures, and swimming pools;
15. Property not eligible for flood insurance pursuant to the provisions of the Coastal Barrier Resources Act.
16. Personal property you own in common with other unit owners comprising the membership of a condo association;
Exclusions
The policy pays only for direct physical loss by or from flood so the following items are excluded:
1. Loss of revenue or profits;
2. Loss of access to the insured property or described location;
3. Loss of use of the insured property or described location;
4. Loss from interruption of business or production;
5. Any additional living expenses incurred while the insured building is being repaired or is unable to be occupied for any reason;
6. The cost of complying with any ordinance or law requiring or regulating the construction, demolition, remodeling, renovation or repair of property, including removal of any resulting debris, except for eligible activities covered under the ICC;
7. Any other economic loss.
Valuation - The value of flood damage in the Dwelling Form is based on their Replacement Cost Value (RCV) or Actual Cash Value (ACV).
RCV:
Replacement Cost Value is the cost to replace that part of a building that is damaged without depreciation. To be eligible for replacement cost, three conditions must be met:
- The building must be a single-family dwelling.
- The building must be your primary residence, meaning you live there at least 80% of the year;
- The building coverage is at least 80% of the full replacement cost of the building, or is the maximum amount available for the property under the National Flood Insurance Program.
ACV:
Actual Cash Value is the replacement value at the time of loss, less the value of its physical depreciation.
Some structure items such as carpeting are always adjusted on an actual cash value basis. For example, wall to wall carpeting could lose between 10-14% of its value each year, depending on the quality of the carpeting. The depreciation would be factored in the adjustment.
Personal Property (Contents) is always settled at Actual Cash Value.
What is Increased Cost of Compliance (ICC)?
Most NFIP policies include ICC coverage, which applies when flood damages are severe. ICC coverage provides up to $30,000 of the cost to elevate, demolish, or relocated your home. If your community declares your home “substantially damaged” or “repetitively damaged” by a flood, it will require you to bring your home up to current community standards.
The total amount of your building claim and ICC claim can’t exceed the maximum limit for Building Property coverage ($250,000 for a single-family home.) Having an ICC claim does not affect a Personal Property claim (up to $100,000,) which is paid separately.
Deductibles
The deductibles will apply separately to building & personal property claims. The building deductible will be applied to the total building portion of the claim and the personal property deductible will be taken from the personal property portion. The typical deductible under a Flood policy is $500.
Key FI Terms
Basement - any area of a building which has its floor subgrade (below ground) on all sides.
Condo association- the entity made up of the unit owners responsible for the maintenance and operation of:
- common elements owned in the undivided shares by unit owners;
- other real property in which the unit owners have use rights where membership in the entity is a required condition of unit ownership.
Dwelling - A building designed for use as a residence for no more than four families or a single-family unit in a building or under a condo.
Enclosure - that portion of an elevated building below the lowest elevated floor that is either partially or fully shut-in by rigid walls.
Elevated building - a non-basement building that has its lowest elevated floor raised above the ground level by foundation walls, shear walls, posts, piers, pilings, or columns.
Grandfathering - An exemption based on circumstances previously existing.
Natural Grade - The grade unaffected by construction techniques such as fill, landscaping, or berming.
New construction - buildings for which the “start of construction” commenced on or after the effective date of any initial FIRM or after 12/31/74, whichever is later, including any subsequent improvements.
Post FIRM Construction - construction or substantial improvement that started on or after the effective date of the initial FIRM of the community on or after 12/31/74, whichever is later.
Pre-FIRM construction - construction or substantial improvement which started on or before 12/31/74, or before the effective date of the initial FIRM of the community, whichever is later.
WYO program - a cooperative undertaking of the insurance industry & FEMA which begun in October 1983. The WYO program operates within the context of the NFIP and involves private insurance carriers who issue and service NFIP policies.
Additional Coverages
The Texas Windstorm Insurance Association (TWIA) is the state’s insurer of last resort for wind & hail coverage in the 14 coastal counties and parts of Harris county. TWIA provides wnd & hail coverage when insurance companies exclude it from their HOI & other property policies sold to coastal residents. TWIA is a “pool” of all property & casualty insurance companies authorized to write coverage in Texas. TWIA provides basic wind & hail insurance coverage for Gulf Coast property owners who might otherwise be left uninsured.
TWIA is similar to other insurance carriers in that we have a written contract that specifies the extent and restrictions of the insurance coverage they provide.
TWIA collects premiums and pays valid claims. Their policies are distributed to PHs owning property in 14 first-tier counties & parts of Harris county along the Texas gulf coast through insurance agents, brokers, and direct writers.
Traditional for-profit insurance companies must assess risks differently than they do. Generally, when estimated risk is low, traditional markets provide windstorm coverage for high-risk areas. They may withdraw from this territory after catastrophic losses occur.
When risk is higher and traditional markets withdraw, TWIA absorbs policies no longer written by other carriers. Because they are a provider of last resort, it is very likely that they will not have the most extensive coverage or the lowest prices.
Types of Farm & Ranch Insurance Policies
Farm & Ranch Owner’s Policy is intended for the family farm, and the policy (either basic perils “Form A” or broad perils “Form B”) is a coordinated package providing both personal & agricultural business insurance protection.
Coverage typically includes the farmhouse, personal contents, loss of use, and personal and farm liability. Coverage can be extended to add farm structures (barns, workshops, etc), scheduled agricultural equipment (tractors etc.) and the risk of animal loss from collision.
Commercial Package Policy - Commercial insurance policies can be used for Farm/ ranch business. A business insurance “package policy” can be custom tailored to fit the needs of most agricultural businesses.
Protection can be offered for Farm Liability plus Farm/Ranch equipment, buildings and other property risks. Generally, commercial insurance contracts are used in situations that don’t include an on-site farm or ranch owner or for larger agricultural operations.
Commercial General Liability - This commercial insurance policy is often used in farm/ranch situations in which the main concern is the premise liability risk for the property owner of rural land. An example would be the landowner has leased the property for cattle grazing.
The farmer would have their own insurance to cover the risks of the cattle operation but the landowner would have a commercial general liability contract to protect them from liability risks involving their land ownership.
Mobile Home Insurance
Mobile HOI was written historically on a monoline form (coverage on the property only) similar to the dwelling policy form written on other houses. With the advent of package policy forms in the 50s, the policy was changed to a multiline form resembling the regular homeowners package policy form. Monoline mobile HOI policies had one important distinction in that any structure attached to the mobile home had to be added by endorsement.
Coverage - the mobile home owners form may be written on an open perils basis, and the coverage on the building (the mobile home,) is settled on a replacement cost basis. Additional items of property attached to the mobile home are covered on an ACV basis.
Unique characteristics of the mobile HOI form - it differs from the HOI policy in some respects while following in others.
- Mobile home coverage section A - applies to the building, attached structures, utility tanks, and permanently installed items such as appliances, dressers, cabinets, floor coverings, and similar property if installed on a permanent basis. A home must have a minimum footprint of 10x40 to be covered.
- Mobile home coverage Section B - for other structures is similar to the HOI form.
- Mobile home coverage Section C - for personal property generally is written with a limit equal to 40% of Coverage A, rather than the 50% specified for homeowners coverage.
- Mobile home coverage Section D, loss of use is 20% of coverage A.
- The pair and set clause is expanded to include panels as a series of pieces or panels.
- Removal coverage is expanded to provide up to $500 for reasonable expenses incurred in moving the mobile home when threatened by a covered peril.
g. The ordinance or law additional coverage (to cover increased costs of repair or or reconstruction resulting from zoning laws or building ordinances that require upgrades after a loss) does not apply to mobile home policies.
Personal Watercraft Coverage
The HOI policy limits watercraft liability & medical payments to others to personal boat & motors within certain length or horsepower guidelines. Because boats and boating property are covered only against a limited number of named perils, broader protection is provided. As an alternative endorsement to the HOI, the following stand alone policies are available:
Boat owners insurance
- It provides coverage for smaller boats used on inland waterways.
- Coverage is provided for physical damage (to the insured boat) only.
Yacht policy
A yacht policy is usually sold as a package policy for larger boats containing both physical damage and liability coverage in order to protect a yacht/pleasure vessel.
Perils covered:
- Other coverages that can be added include damage caused by windstorm, flood, and collapse of a building
- Shoring, which can be caused during a windstorm or bad weather.
Property covered:
- Coverage is provided for the hull, sails, spars, tackle, machinery, boats, and furniture on a yacht.
- Coverage may also be extended to cover a boat trailer.
