Opening eyes to the need for excess flood insurance, even on top of National Flood Insurance Program coverage, is key to filling this critical gap in home and business property insurance programs.
With the drought of 2012 dominating weather headlines this summer, the threat of flood may not be top of mind for many homeowners and businesses. Yet flood remains the most common natural disaster in the United States.
Most property owners wouldn’t think of going without fire insurance. But why are so many willing to take a chance by going without flood insurance? Perhaps a common misconception about the meaning of the term “100-year flood” is leading them to underestimate the true risk of flood. “A ‘100-year flood’ doesn’t mean a flood will happen in a given area only once every 100 years. It means the flood elevation a property is located in has a one percent chance of being equaled or exceeded each year,” explains Donna Dodd, Director, Personal Lines Underwriting at Burns & Wilcox.
“Statistically speaking,” she adds, “this means that a property in a 100- year floodplain has a 26-percent chance of being flooded at least once over the span of a typical 30-year mortgage.” In a 500-year floodplain, the annual chance of flood drops to 0.2%, but that still equates to a six-percent chance — roughly one in 17 — over a 30-year span.
“If all property owners understood the chance of loss due to flood over time, there would be a much better understanding of the need for flood insurance,” says Kasey Vaughn, Branch Manager in Burns & Wilcox’s Morehead City, N.C., office.
Nearly Every Property at Risk
More than 50 percent of the nation’s population lives within 50 miles of the coast, but floods don’t just happen to coastal or other higher-risk areas. On average, 30 percent of flood losses come from B, C, or X (“moderate” or “minimal” risk) zones.
Unlike some other natural disasters, there is no “flood season.” Stormwater runoff and heavy rains in summer or snowmelt in spring can cause tremendous damage: the great Midwestern flood of 1993 lasted more than four months and caused $16 billion in loss. Even high-hillside properties can be affected by cascading water.
Levees and dams that are designed to protect properties from water can fail. According to the U.S. Army Corps of Engineers, a large number of levees need maintenance, and many are areas of concern and should be repaired. What’s more, of the 74,000 dams in the U.S., one-third pose a significant risk if they fail, according to the National Inventory of Dams. A property’s exposure to flood can also change significantly over time, such as by changes to topography and natural drainage caused by new construction nearby.
In other words, nearly every property is subject to flood risk. “Unfortunately, many people do not understand the true risk of flood until it’s too late,” Dodd says. Indeed, only 17 percent of property owners in the U.S. carry any type of flood coverage.
National Flood Insurance Program: Worthwhile But Limited
Affordable flood coverage is available through the National Flood Insurance Program (NFIP), but not all areas are insurable. The government limits its liability by excluding certain high-risk properties.
“There are at least 100 communities on the Atlantic and Gulf Coast that can’t get coverage through the NFIP either because of their location or lack of mitigation, such as levees, sea walls, and so on,” says Dodd. Some examples of ineligible locations include the Outer Banks of North Carolina and sections of the Florida Panhandle.
The Coastal Barrier Resources Act (CoBRA) also prohibits the purchase of NFIP coverage in some areas to discourage building in environmentally sensitive locations and to protect wildlife, such as sections of Galveston Island, Texas. Coverage for flood loss is also capped in the NFIP program for residential properties at $250,000 for buildings, $100,000 for contents. For commercial properties it is at $500,000 for buildings and $500,000 for contents.
“It doesn’t take much to surpass $500,000 on a commercial property,” says Jeff Diefenbach, Vice President in Burns & Wilcox’s Chicago offices. “If the property owner has a $5 million exposure, they need a way to close the gap.”
“Lenders to condo associations in flood zones are typically requiring full limits on flood coverage to approve financing. This can be quite challenging since the federal flood limits rarely make a dent in building values,” adds Daniel Rossen, Vice President in Burns & Wilcox’s Chicago offices.
Even in the residential market, NFIP limits may prove inadequate. The average price of a new home, according to U.S. Census data, is $272,900. That average climbs for coastal homes. “There are very few homes on the coast that are worth just $250,000,” says Vaughn. “Insuring properties of $1 million or more is common. Therefore, the NFIP limitation is a serious consideration.”
Plugging the Leak
Excess flood insurance plays an important role in managing flood risk and addressing the limitations of the NFIP program. Like other excess policies, excess flood provides limits of insurance over underlying limits, or primary limits for properties ineligible for the NFIP program.
“The best approach is to buy as much federal insurance that is available and then look to the private market to increase limits or fill in gaps,” Rossen explains.
Awareness of the need for excess flood coverage ebbs and flows. “After every flood there is an uptick in interest,” says Vaughn. “However, it requires an ongoing effort and continued education to keep brokers and buyers aware of the risk.”
Most excess business is written on non-admitted paper. Burns & Wilcox deals with at least five distinct excess flood markets, from Lexington Insurance to Lloyd’s of London. “We scour the marketplace,” Diefenbach says. “We often turn to Lloyd’s, but other domestic markets can be available.”
Excess coverage can also be structured through a Difference in Conditions (DIC) policy, which picks up gaps found in the standard property coverage part, including flood, earthquake, and other causes of loss. Given the varied options available, Diefenbach says that brokers and buyers need to carefully assess coverage. “Some markets can be ‘follow form,’ yet there are other markets that give additional coverage. Working with a brokerage that writes a lot of flood coverage helps ensure that a program is put in place that is best suited for a particular insured’s exposure to loss.”
A broker’s experience is also important because the underwriting of flood coverage is often time-sensitive. “Flood coverage tends to have a short fuse,” Diefenbach says. “It’s often one of the last pieces of an insurance program to be worked.”
Burns & Wilcox can write coverage for excess limits over NFIP, NFIPineligible properties and non-participating communities, coverage for real estate assets on a reporting form, coverage for flood on builders risk policies, and coverage with a broader definition of flood, including backup of sewer and drains.
“Brokers and buyers need to take a serious look at flood and excess flood coverage,” concludes Vaughn. “Unfortunately, it’s often only after a property is flooded that owners realize the real risk they face.”