Flood Insurance: Rising Waters, Rising Costs

Flooding is the most common and expensive natural disaster in the United States, causing billions of dollars in losses annually. Historic floods like those related to Hurricanes Harvey, Irma, and Maria in 2017, Superstorm Sandy in 2012, and Hurricane Katrina in 2005 capture worldwide attention, but floods occur each year. In 2018 (most recent data available), there were almost 32,000 flood insurance claims with an average paid loss of $42,580.1

According to the National Weather Service, 128 million people face an elevated risk of flooding in their communities in the spring of 2020, with 28 million at risk for moderate flooding, and 1.2 million at risk for major flooding. The greatest flood risk this spring is projected to be in the basins of the Mississippi River, the eastern Missouri River, and the Red River of the North, as well as across much of the southeastern United States.2

Young couple holding buckets to catch water dripping from overhead.

Do You Need Coverage?

Despite the dangers, only 15% of U.S. homeowners had flood insurance in 2018. This is an increase from 12% in 2016, due perhaps to the high-profile losses from the 2017 hurricanes, but many homeowners who might benefit from flood insurance still lack coverage.3

Mortgage lenders require flood insurance for homes in designated high-risk flood plains, called Special Flood Hazard Areas (SFHAs). Lenders in some lower-risk areas may also require it. Even if you own your home outright or do not live in an SFHA, you may want to consider coverage. About 25% to 30% of federal flood insurance claims have been filed outside of SFHAs.4 The National Flood Insurance Program (NFIP) offers a lower-cost Preferred Risk Policy for coverage in areas with low to moderate risk.

If you currently have flood insurance, this might be a good time to review your coverage to be sure it meets your current needs. You should also be aware that the NFIP will be changing its risk assessment model as of October 1, 2021, which may have a significant impact on premiums for some homeowners. (See more information below.)

Insurance from the Ground Up

Water damage to your home from a leaking pipe, a broken dishwasher, or a hole in your roof — water that comes from the top down — is typically covered by your homeowners insurance policy (up to your policy limits). However, damage from water that enters from the ground up is excluded from most homeowners policies and requires a separate flood insurance policy.

Most flood coverage is provided under the National Flood Insurance Program either directly or from private insurance companies that work with the NFIP through a program called Write Your Own (WYO). An NFIP/WYO policy provides up to $250,000 in replacement cost coverage to rebuild the structure as it was before the damage, with possessions covered for up to $100,000 of their actual cash value (replacement cost minus depreciation). Renters may purchase a policy that covers only their belongings.

Private insurance companies may offer higher limits and/or coverage in areas where NFIP insurance is not available. New federal regulations effective July 1, 2019, provide more flexibility for lenders to accept policies issued by private insurers.

To be considered a flood for insurance purposes, water must cover at least two acres or affect two properties. Typically, there is a 30-day waiting period before flood coverage goes into effect, so property owners should not wait until there is an imminent threat to buy flood insurance.

Assessing Risk

The Federal Emergency Management Agency (FEMA) calculates the degree of risk in your community based on assessments of rainfall, topography, tidal surge, flood control measures, and other variables. Flood-hazard maps identify risk levels, depicting areas of high risk, moderate to low risk, or undetermined risk.

Under the current system, flood insurance premiums are based on the level of risk indicated on FEMA’s flood-hazard maps, along with other factors such as building elevation and age. In general, all properties in a given flood zone are rated for the same level of risk. This tends to make premiums higher for lower-priced homes in relation to more expensive homes, because more expensive homes are more likely to reach the maximum $250,000 replacement cost of a FEMA policy and require government subsidies beyond that in order to rebuild.

Effective October 1, 2021, a new system called Risk Rating 2.0 will provide a more individualized picture of a property’s risk, using a wider range of data including the distance to the coast or other flooding source, different types of flood risk, and the cost to rebuild a home. This system is intended to make it easier for homeowners to understand the actual risk to their homes and set premiums more in-line with that risk. Risk Rating 2.0 may raise premiums for some high-valued homes, lower them for lower-valued homes, and make flood insurance more affordable for homeowners in lower risk levels. Statutory limitations on premium increases will still apply, helping to transition homeowners who face premium increases.

To find out more about flood insurance and the risk in your area, including the appropriate flood-hazard map for your address, visit floodsmart.gov.

Mitigation Measures

If you are in a high-risk area, you may want to consider mitigation measures such as raising the elevation of your home, floodproofing lower sections of the structure, or building a barrier such as a levee or floodwall. All these measures can be expensive, but the expense may be worth the potential protection and could save money in the long run. Elevating a building three feet or more above the Base Flood Elevation on the flood-hazard map for your location can reduce annual premiums 60% or more, while elevating one foot might reduce premiums by 30%.5 A 2007 NFIP study found that homeowners can usually recover the cost of elevating a building over five to 15 years in a standard flood zone.6

For structures that have already been substantially or repeatedly damaged by flooding, most standard NFIP policies include up to $30,000 of Increased Cost of Compliance Coverage, which provides funding for elevating, moving, or demolishing the structure. Nonresidential properties are eligible for certain other floodproofing measures under the coverage. Government grants also may be available in some areas for flood mitigation.

For more information on flood mitigation, download FEMA’s Homeowner’s Guide to Retrofitting at fema.gov/media-library/assets/documents/480. For structures that cannot be elevated, also see Reducing Flood Risk to Residential Buildings That Cannot Be Elevated at fema.gov/media-library/assets/documents/109669.