What is Flood Insurance and Why Do You Need It?

Posted on May 09, 2022
What is Flood Insurance and Why Do You Need It

As defined by FEMA, a flood is:

A general and temporary condition of partial or complete inundation of 2 or more acres of normally dry land area or of 2 or more properties (at least 1 of which is your property) from:

  1. Overflow of inland or tidal waters; or
  2. Unusual and rapid accumulation or runoff of surface waters from any source; or
  3. Mudslides (i.e., mudflows) which are proximately caused by flooding and are akin to a river of liquid and flowing mud on the surfaces of normally dry land areas, as when earth is carried by a current of water and deposited along the path of the current.; or
  4. Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.

Flood insurance is defined as a type of property insurance that covers damages caused by a flood to a building and its contents.  It provides coverage for a personal home or commercial dwelling for losses sustained by water damage, specifically due to flooding.  The flooding could be caused by :

  • Prolonged rain
  • Heavy rain
  • Coastal storm surges
  • Melting snow
  • A failed levee dam
  • A blocked storm drain

This kind of insurance comes in two forms: personal flood insurance and commercial flood insurance.

What water damage is not flood?

Although flood insurance helps protect your home or business in the event of flood damage, it may not provide coverage for the following types of damages:

  • Avoidable water damage, especially if caused by moisture, mold, or mildew
  • Damage caused by a backup in the drainage system, unless flooding caused it
  • Damage to precious metals, documents, currency, etc
  • Damage to property located outside the building
  • Economic losses caused by interruption of business

What is personal flood insurance?

Also known as homeowners flood insurance, personal flood insurance covers damage caused by floods to homes.  The scope of coverage varies depending on the policies of the insurance provider.  Typically, a homeowner’s flood insurance covers the following: 

  • The building and its foundation
  • Electrical systems in the building
  • HVAC systems
  • Cooking stoves and appliances
  • Window blinds
  • Refrigerators
  • Certain types of carpets
  • Radiators 
  • Furnaces 
  • And so on. 

Most insurance agencies also offer separate policies to protect the homeowner’s personal property.  The main difference between this type of coverage and general personal flood insurance is that the former covers damages to specific items owned by the insured.  Examples of such items include: 

  • Washers and dryers
  • Clothing
  • Furniture
  • Electronic equipment
  • Microwaves
  • Food freezers (sometimes this coverage also covers the food in the freezer)
  • And so on. 

Why do you need homeowners’ flood insurance?

Homeowners’ flood insurance comes in handy in different situations.  Here are some of the most common reasons to purchase this insurance. 

No insurance, no mortgage

Some mortgage companies require homeowners to have flood insurance before closing and maintain the insurance until the loan is fully paid.  Without this insurance, such mortgage companies may not approve home loans for the borrower.

Numbers don’t lie

According to statistics, flood insurance is usually one of the most overlooked types of homeowners insurance.  However, data from the National Flood Insurance Program shows that at least 40% of insurance claims occur outside areas considered to be at high risk for flooding.  By the time homeowners realize that they need flood insurance, it is usually too late to recover damages. 

Saves you money

Floods can cause an unimaginable amount of damage to your property.  For example, one inch of flooding could cost damages of up to $25,000.  So when you compare the costs of obtaining flood insurance to repairing or replacing property damaged by a flood, the former is cheaper. 

Most homeowners tend to believe that the government will provide financial assistance in the event of a disaster caused by flooding.  Unfortunately, this could be true and false at the same time.  Here’s why. 

The government may indeed provide financial assistance in such a situation through the Federal Emergency Management Agency (FEMA).  However, not every flooding incident qualifies as a disaster.  Keep in mind that FEMA primarily responds to disasters, so if the flooding incident is not considered a disaster, you may not be eligible for funding even if you’ve suffered significant property damage. 

Now let’s look at the other side of the coin.  Suppose the flooding incident qualifies as a disaster.  In that case, FEMA’s assistance may not cover every damage incurred.  In fact, the financial aid might not even cover a quarter of the damages. 

To put things into perspective, the average NFIP claim after Hurricane Harvey was $100,000.  However, the average FEMA assistance stood at $7,000.  That’s a difference of at least $93,000.  The bottom line is that only flood insurance can protect you in such a situation. 

What is commercial flood insurance?

Commercial flood insurance, also known as business flood insurance, is the type of insurance that protects your business from damages caused by floods.  Although many business owners often overlook commercial flood insurance, this type of insurance comes with many benefits.

Like any other type of insurance, the scope of coverage for business flood insurance depends on the policies of that particular insurer.  Typically, this type of insurance covers the following:

Commercial building

This policy covers the building against damage by floods.  But what happens if you don’t own the building?  If so, the insurance will cover eligible upgrades you made to the building.  For instance, if you rent an office space and upgrade it to suit your business needs, the upgrades may be eligible for coverage in the event of flood damages. 

Property in the building

Business flood insurance also covers your business inventory, including tools and machinery, merchandise, equipment, and other eligible items.  However, it’s important to note that you may need to purchase both policies – coverage for business property and coverage for the business building – to expand the scope of coverage.

Why do you need commercial flood insurance? 

If you own a business, whether big or small, you may need flood insurance even if you don’t think you do.  Here’s why:

Most business insurance policies don’t cover flooding

The fact that you have business insurance doesn’t necessarily mean that you’ve protected the business from damages caused by floods.  This is why it’s always advisable to read and understand everything covered by your business insurance.  In most cases, the standard business insurance doesn’t cover flooding.  Unfortunately, it may be too late by the time you realize this. 

Flooding can ruin your business

Your business could be one flood away from permanent closure.  The last thing you want is to pay thousands of dollars to repair or replace items damaged by floods.  For instance, electrical equipment damaged by water may require complete replacement, not repair.  And when that happens, you may have to break into your business savings if you’re lucky enough to have one. 

Statistics show that one in four businesses that suffer damages caused by flooding does not reopen after shutting down.  This is usually because of the high repair and replacement costs. 

Various natural disasters can cause flooding

Studies have shown that at least 90% of natural disasters involve flooding in one way or another.  Some examples of these disasters include heavy rains, melting snow, hurricanes, tornados, rising sea levels, etc.  So even if your business is not located in a high-risk area, flooding isn’t something you can easily prevent or predict.  But the good news is that you may be able to recover the damages when you purchase commercial flood insurance.

How Otterstedt Can Help

It’s important to note that not every type of insurance policy you come across suits your needs.  Some insurance agents might sell you any policy and move on to the next potential client.  For this reason, you need an insurance agent that understands your needs and helps you find a customized policy. 

Flood insurance is important to your business and home.  But, the kind of insurance policy you choose is even more critical.  Failure to select the right policy could lead to further losses.  You’ll lose your money, and you won’t receive adequate compensation.

But that’s not something you need to worry about when you contact our insurance agents.  We’ll listen to your needs and concerns and help you choose the kind of policy that makes you rest easy, knowing that your valuable property is covered in the event of a flood. 

Hailed as one of the top 50 Insurance Agencies in the country, Otterstedt has been helping homeowners and business owners find the perfect insurance policy for more than 100 years.  Our insurance agency serves clients in New Jersey and surrounding areas.

If you’re not sure what type of insurance policy you need, contact us today to speak with a licensed agent.

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