As insurance brokers, the focus of August 2016 is the flooding in Louisiana, due to heavy rains. Once the final drop fell and damage was assessed, insurance companies found that many of the flooded homes were rated as a “low-risk” flood zone. The Advocate reported that “of an estimated 54,611 residential structures damaged in the storms, 27,494 were not in what the federal government deems a “high-risk area”, according to city-parish assessments.” Those who were not required to buy flood insurance, most likely did not.
The litmus test used by homeowners when deciding to purchase flood insurance is “does my lender require flood insurance?” From an insurance agent’s point of view, this is the least informative method of deciding to purchase flood insurance. Homeowners need to understand what the NFIP risk classifactions mean as well as probe their own financial situation before making the decision to purchase, or not purchase, flood insurance.
Most homeowners understand what a “high-risk” classification means, in theory. Most people in New Jersey understand that their property is close to the shore, and is in danger of flooding. However, what insurance companies understand this to mean is that the subject property has a 1% chance of flooding every one hundred years. In other words, insurers view your property as “high risk” if it is in danger of flooding once every hundred years.
The major misunderstanding relates to moderate to low risk areas. When the average home buyer hears this classification, they understand it to mean that the potential home is not in a flood zone. But that is not exactly the meaning. A low or mid risk classification means those properties could expect flooding every 100 to 500 years. Granted, the average human lifespan is nowhere near 500 years, it is also important to realize that the weather can be unpredictable and flooding can occur due to heavy rains, as happened in Louisana this month. According to an NPR report about Louisana, “The National Weather Service says the likelihood that so much rain would fall in so little time was about one- tenth of 1 percent.” In short, the question for any property isn’t “if” the property will flood, but “when”.
After understanding the classifications, home owners need to ask themselves, “Would I be able to recover financially, should my home be flooded?” “Do I have the funds to repair the foundation of my property, my basement walls, the siding, etc.” If the answer is no, then at the very least get a non-binding quote.
There is some relief in a property being classifed as low or mid risk, and that is premium pricing. Premiums are significantly lower for low and mid risk property. And if a homeowner lives in a home that was recently reclassified to high risk, he or she may have the ability to be grandfathered in to the lower premium rates for a low risk property.
There are two lessons that the rest of the country can learn from Louisana, specifically the risk averse. The first is prepare yourself for heavy rains. Secondly, homeowners should not let their lender’s requirements determine their decision to purchase flood insurance. Each homeowner should take the time to understand what the potential risk is, how much it could possibly cost to recover from a flood loss, determine if he or she would have the funds to recover, what a flood policy can do for them and finally obtain a flood quote. Let this due dilligence process guide the decision to purchase flood insurance, not any third party’s opinion.