This type of insurance refers to a specific type of policy that protects against the loss of property due to flooding. In order to determine which areas of the country are more likely to experience flood damage, insurance policy holders will often use topographical maps that show floodways and lowlands. The price of the insurance policy may differ slightly depending on whether an individual lives in an area where floods are likely to occur often.
Who Is Covered?
In the U.S., only about 20% of people who own homes that are at risk for flood damage actually have insurance for floods. The majority of private insurance companies don’t protect against flood destruction because of adverse selection or the purchase of insurance policies by homeowners who are most often affected by floods specifically.
In traditional insurance policies, insurance companies use the economic principle of large numbers to charge policy holders small amounts of money. This money is used to pay off the claims of the small group of insurance policy holders who have suffered damage or loss. However, with insurance for floods, the number of people who claim damages is notably larger than the amount of people who want to protect their homes from flood damage. This means that private insurers don’t project making a significant profit by providing insurance for flood damage. So, in many cases, property owners will have to take out private policies to ensure they can recover the funds necessary to restore their quality of life if flood damages occur on their property.
However, there are certain parts of the country that are prone to flood where the federal government requires insurance that protects against flood damage for the security of FHA and VA mortgage loans.
Who Is Eligible?
People who have home mortgage are required to buy a separate insurance policy for their homes that covers flood damage. The policy must come from a private primary flood insurance company, and the company must be a National Flood Insurance Program distributor. Having this policy in place can provide peace of mind for individuals and families, even if the policy never needs to be used.