490.1

OVERVIEW OF THE NATIONAL FLOOD INSURANCE PROGRAM

(November, 2006)

Private insurers are poorly equipped to handle catastrophes. The financial resources need to handle a catastrophic source of loss, such as flooding, doesn't exist. A single loss event may affect hundreds and even thousands of homes and businesses at the same time. Further, the amount of damages suffered by each property owner is severe. Where private industry is poorly equipped to handle an insurance need, the task is often taken up by a public entity. In this case, the entity is the federal government. In 1968, the National Flood Insurance Act was passed. The purpose of the Act was twofold:

·         To provide insurance coverage to certain persons whose property has been substantially damaged by flooding

·         To encourage communities to practice building and land use methods that help mitigate (ideally eliminate) damage from flood

COVERAGE

The Standard Flood Insurance Policy is designed to cover one- to four-family residences as well as their contents from flood damage. The policy will also protect tenants’ personal property and residential condominium unit-owners. In the latter instance, the policy can be used to insure a unit-owner's individual interest in the structure and in the building's common elements (areas that are commonly owned by all unit-owners). The policy must be written in the name of the insured and the association, as their interests may appear. The Residential Condominium Building Association Policy is available to insure the condominium association’s residential condominium building. A Flood Insurance Policy for General Property is available for non-residential structures and their contents, including commercial and manufacturing properties. The NFIP Program also has a Preferred Risk Policy that is available to one- to four-family residential buildings that are located in flood zones B, C or X. The Preferred Risk Policy is not available for condominiums. For more information on flood zones, please refer to PF&M Section 490.1-4, National Flood Insurance Program Flood Zone Explanations.

LOSS SETTLEMENT BASIS

While most flood losses are settled on an actual cash value basis, replacement cost coverage is a settlement option that is available to a single family principal residence, but not to either multi-family dwellings or “general property.''

WHAT IS COVERED?

This insurance covers direct physical loss to insured property by flood. It also covers the reasonable expenses for sandbags, construction materials and even the human labor in handling the materials that are used to minimize flood damage. The reimbursement for labor uses the prevailing federal minimum wage. The maximum amount payable is the minimum building deductible amount applicable.

Note: To qualify for such coverage, the insured property must actually be in imminent danger of sustaining flood damage.

WAITING PERIOD

The NFIP uses a 30-day waiting period to control persons from arranging for flood insurance when disaster is imminent. However, there is no waiting period when either new coverage is sought during the initial 30 days of a community entering the NFIP or when a new owner applies and pays for coverage before the closing of a mortgage loan.

FLOOD DEFINED

The NFIP defines “flood'' as a general and temporary inundation of normally dry land from the overflow of inland or tidal waters, the rapid accumulation or runoff of surface waters, or mudslides (mudflows) which are caused by flood and collapse.

EXCLUSIONS

The policy excludes losses caused by:

·         theft, loss of profits, fire, windstorm, wind, explosion, earthquake, land sinkage, land subsidence, landslide, land movement resulting from subsurface water accumulation, gradual erosion, or any other earth movement, except such mudslides or erosion as are covered under the peril of flood,

·         rain, snow, sleet, hail or water spray; or by freezing, thawing, the pressure or weight of ice or water, sewer backup or seepage of water unless the insured property has first been damaged by flood,

·         water, moisture or mudslide damage created by a condition confined to the insured building or that is within the insured's control,

·         a flood which is already in progress as of 12:01 A.M. of the first day of the policy term,

·         a flood which is confined to the insured premises unless the flood is displaced over two acres,

·         modification to the insured property which materially increases the risk of flooding,

·         intentional actions by the insured or a member of the household,

·         power, heating or cooling failure (unless the system was directly damaged by a flood),

·         flooding of property leased from the federal government when the flooding is caused by the federal government.

DWELLING COVERAGE

The insurance applies to the described residential building and includes building additions, building equipment, fixtures and outdoor equipment while within an enclosed structure on the premises; also, construction materials and supplies.

Up to 10% of the dwelling insurance limit may be applied to detached garages and carports at the described premises, unless the structures are rented or used for business purposes. Applying the policy limit in this manner does reduce the available coverage for the residence.

CONTENTS COVERAGE

Contents coverage applies to all household and personal property which belongs to an insured while it is contained within a building at the property address. The insured may elect to have the policy coverage extend to the property of a servant or guest of the insured.

Up to 10% of the contents insurance limit may be applied to cover improvements and betterments.

A condo unit-owner may apply up to 10% of the contents insurance limit to cover the interior walls, floors, and ceilings IF they are not covered by a condo association policy.

A maximum of $2,500 (per occurrence) is available to cover fine arts, jewelry and fur items.

Note: Only $2,500 is made available for ALL losses to property in these classes.

Example: Cameron Driptrue’s home just suffered a serious flood loss. His Standard Flood policy has the following limits:

The flood occurred in a flash, so Cameron was only able to move a carload of personal belongings as he and his family escaped the danger. Cameron’s claim for losses included $19,000 for contents with nearly $5,000 of that amount consisting of his collection of modern artwork, his wife’s full-length ermine coat and some valuable statuettes made of expensive woods. Unfortunately, Cameron is only able to collect a total of $2,500 for the latter, very high-valued property.

DEBRIS REMOVAL COVERAGE

The policy covers expenses for removing debris of or on the covered building or contents covered. But this coverage is provided as part of the policy’s insurance limits and is NOT additional coverage.

PROPERTY NOT COVERED

A Standard Flood Insurance Policy is designed to provide basic protection to contents. Therefore, similar to other types of policies that protect buildings and property, it has a laundry list of items that do not qualify for coverage. Specifically, the Standard Flood Insurance Policy does not cover:

·         currency, bills, accounts or similar valuable papers or records,

·         contents used with or for any business purpose,

·         newly constructed or substantially improved buildings located seaward of mean high tide, or entirely in, on, or over water,

·         fences, retaining walls, seawalls, swimming pools, bulkheads, wharves, piers, bridges, docks; other open structures located on or over water, including boat houses or other similarly used structures,

·         personal property in the open,

·         land values, lawn, trees, shrubs, plants, growing crops, or livestock,

·         underground structures and equipment including wells, septic tanks/systems and portions of walks, driveways and other surfaces that are outside the foundation walls of the building,

·         animals, birds, fish; aircraft, any self-propelled vehicle or machine and motor vehicles (except those that service the premises, including their parts),

·         trailers on wheels, recreational vehicles and watercraft including their furnishings and equipment; and business property,

·         enclosures, contents, machinery, building components, equipment and fixtures located below the lowest elevated floor of an elevated building; however there is coverage for sump pumps, well-water tanks, oil tanks, furnaces, hot water heaters, clothes washers and dryers, food freezers, air conditioners, heat pumps and electrical junction and circuit breaker boxes that are located in basements of buildings built or altered before October 1, 1983,

·         buildings and their contents, where more than 49 percent of the actual cash value of such buildings is below ground (with exceptions for earth being used as insulation that is in compliance with FEMA rules),

·         mobile home located within a Special Flood Hazard Area (SFHA) that is not anchored according to FEMA requirements,

·         containers such as gas and liquid tanks,

·         mobile homes (or contents) located within a coastal high hazard area (Zones V1-V30) which are not in a mobile home park or subdivision established before June 1, 1982, or

·         buildings which were built or altered after October 1, 1983 and are located in an undeveloped coastal barrier that was established by the Coastal Barrier Resources Act.

DEDUCTIBLES

A loss deductible applies separately to each building loss and personal property loss. The minimum policy deductible is $500 for each loss to building and contents. Under the NFIP Emergency Program, a minimum $750 deductible applies to each building loss and personal property loss.

IMPORTANT CLAUSES AND PERMITS

If there is any change to the National Flood Insurance Act that results in a NON-PREMIUM BEARING change that broadens or extends coverage under the flood policy; that benefit is granted to a covered building that is being altered, built or repaired during the policy period or up to 45 days before the inception date of the current policy period.

MORTGAGEE INTEREST

If the flood policy is canceled for non-payment of premium (the only grounds for company cancellation), coverage will stay in force for 30 days after the cancel date in order to protect the insurable interest of the mortgagee (or trustee). The mortgagee (or trustee) also has the right to submit a proof of loss when it is notified that the insured has failed to do so. The other applicable policy obligations and provisions then apply to the mortgagee.

OTHER INSURANCE

The company is not liable for a greater proportion of any loss, less the amount of deductible, from the peril of flood other than the amount of insurance the policy bears to the whole amount of (primary) flood insurance covering the property regardless whether the insurance is collectible. If the total amount of primary flood insurance on a covered property exceeds what is allowed under the National Flood Insurance Act, the company’s proportion of coverage is based on the TOTAL amount of insurance allowed. In certain instances, the insured may request a partial refund of coverage.

IN EVENT OF LOSS

Payment of any loss under a flood Insurance policy does not reduce the insurance applicable to another separate loss during the policy term. Losses from a continuous or protracted occurrence are considered to be single occurrence.

Loss of an article which is part of a pair or set will be settled in proportion of the total value of the pair or set, giving consideration to the importance of the article, but will not automatically be considered as a total loss of the pair or set.

The insured must give written notice, as soon as practicable, to the company, of any loss; protect the property from further damage; separate the damaged and undamaged property and put it in the best possible order. Within 60 days after the loss, the insured must send the company a proof of loss.

The company has the option to take all or any part of the property at the agreed or appraised value, and also to repair, rebuild or replace the property destroyed or damaged with other of like kind and quality. The company must tell the insured what it plans to do within 30 days after receiving the proof of loss.

The amount of loss for which the company is liable is payable 60 days the company has BOTH received a proof of loss and has determined the amount to be paid.

An insured under a flood policy can’t file a legal action against the company while complying with every applicable policy provision. If a suit is filed, it has to be done within 12 months of the day after being notified that all or part of a claim has been rejected.

CANCELLATION PROVISIONS

A flood insurance policy may be canceled at any time at the request of the insured. However, the premium paid for the remaining policy term is fully earned if the insured retains an interest in the covered property. Considering the premium to be fully earned removes an incentive for persons to just carry coverage during parts of the year that are storm or flood prone. The NFIP uses a form for companies to use that lists valid, company-requested cancellations. For more information, please refer to PF&M Section 490.7-2, Flood Insurance ACORD Form Considerations.

OTHER ASPECTS OF THE NFIP

WRITE YOUR OWN (WYO)

The Write Your Own (WYO) Program is a cooperative effort between the insurance industry and the Federal Insurance Administration. WYO allows participating insurance companies to write and service the Standard Flood Insurance Policy in their own names; but is still subject to all of the NFIP’s rules and regulations. Participants receive an expense allowance for policies written and claims processed while the Federal government retains responsibility for underwriting losses. An insurance producer has the options of placing flood insurance directly with the NFIP Servicing Agent, or with one or more WYO companies. Each WYO Company determines its own procedures for developing and compensating its agents.

COMMUNITY RATING SYSTEM

The Community Rating System was created by the FIA to provide insurance rate credits for voluntary flood mitigation projects that exceed the NFIP's minimum requirements for floodplain management. Under the CRS program, qualifying projects can include future flood reduction measures for existing structures, construction of new buildings, and campaigns to increase community awareness about flood insurance.

MORTGAGE PORTFOLIO PROTECTION PROGRAM

The Mortgage Portfolio Protection Program helps mortgage lenders review their loan portfolios and identify properties in special flood hazard areas (SFHA). The homeowner is notified and then required to buy a flood insurance policy. If the owner buys insurance, the lender is permitted to place flood insurance on the property. Force placing flood coverage is to be done as a last resort. Note that a mortgagor must disclose the need for insurance to the borrower, the Flood Disaster Act of ‘73, information on the necessary amount of insurance and the property’s flood zone.

REPETITIVE LOSS STRUCTURES

Repetitive Loss Structures are properties that the NFIP has identified to have suffered substantial, repeated flood losses. Consisting of roughly 11,000 properties nation wide, the risks have been separated from participation in the regular flood program. They are written and maintained under a Special Direct Facility. While in the SDF, additional losses will be closely monitored and every effort will be made to alter such risks in order to mitigate future losses.