NFIP or private flood insurance?

Questions can help your clients choose

The National Flood Insurance Program has been the main flood insurance provider in the United States since its inception in 1968.  But is it always the best option for your clients?  Private flood insurance provides clients with options to supplement or replace NFIP coverage.

What are the five key flood insurance questions agents should keep in mind to help prompt conversations with their clients?

Q. Is your client’s home replacement value greater than $250,000?

If the answer is yes, then it could be a good idea to discuss flood insurance coverage limits with them.

Agents should focus on a property’s current replacement costs, not market value. When I talk to agents, I always tell them to insure the home for reconstruction costs.

If a home has a flood loss, how much will it cost to bring it back to its previous state?  This can be complicated by the increased cost of building materials and scarcity of labor given heightened demand. If a home is insured for $250,000 and the replacement cost is $500,000, then the homeowner may not have adequate coverage to get his or her home repaired. Costs exceeding $250,000 would be the owner’s responsibility. As an example, if a homeowners insurance policy provides coverage for the structure at $500,000 flood insurance coverage for the structure should be the same amount. Tools to help calculate replacement cost are available through some of the home insurance carriers. Marshall & Swift also offers a replacement cost calculator as well. Keeping up to date on current inflation rates and understanding that rebuilding costs will increase after a flood event helps to ensure you provide your client with policy options to cover their largest asset.

The NFIP’s maximum limit for residential structures is $250,000. This limit has become an issue for many Americans facing a flood loss in the face of sharply rising reconstruction costs. Data from the National Association of Home Builders shows construction costs went up by 26.1% year-over-year from 2020 to 2021. The cost of softwood lumber contributed to the rise in costs after the U.S. doubled tariffs on Canadian lumber and wildfires reduced lumber production for an industry already struggling with supply-chain issues.

With increased replacement costs, a growing percentage of your clients’ homes may be valued above the NFIP limit. Fortunately, there are two solutions you can offer to these clients: private flood insurance with higher limits than the NFIP, or private excess flood insurance in combination with the NFIP.

Some private flood insurance policies[1] offer a maximum residential building limit of up to $1,250,000 and can be a great alternative to the NFIP.  Alternately, clients can choose to add an excess flood policy,[2] which offers up to a $5,000,000 limit, in addition to their NFIP coverage or their private flood policy.

Q. Does your client want flood coverage fast?

If your clients want to arrange flood insurance quickly, they may want to consider private flood insurance. This is because the Federal Emergency Management Agency, which administers the NFIP, typically requires a 30-day waiting period for an NFIP policy to go into effect.

For some new homeowners, a 30-day waiting period may not be a problem, but for others—especially those residing in Special Flood Hazard Areas—it may present a more serious issue.

Luckily, private flood insurance policies offer another option. Many private flood insurance policies have shorter waiting periods (e.g., 15-day waiting period) or, if it is being used to satisfy a loan closing, there is no waiting period at all.

Q. Does your client know the value of his or her personal property?

Assessing your client’s personal property values can be incredibly helpful in determining the best flood policy for him or her.  Most people tend to underestimate the value of their personal property.

Generally, people don’t realize how much they have in terms of their personal possessions. Think of a home. If you were to turn it upside down, everything that comes out is your contents, and you don’t realize how much you have until it’s gone.

Every couple of years, homeowners should take stock of their belongings and create a personal inventory. It’s important to take photographs or videos of your possessions. Clients should state their name and property address at the beginning of the video. The personal inventory should include descriptions of items, model numbers, serial numbers, or other identifiers. Save the images or videos to a cloud or thumb drive. The NFIP and private carriers will require an inventory of the damaged items to show proof of loss. Some key items to include are:

• Electronics
• Furniture
• Sports/Gym Equipment
• China/Glassware
• Musical Instruments
• Appliances
• Clothing
• Household items

Once the tally is complete, homeowners should note their total personal property value. The NFIP only covers personal belongings up to $100,000, so if your client’s personal property is worth more than that amount, he or she may want to consider private flood insurance options. NFIP offers contents only coverage, which most of the private carriers will not do.

Some insurance products offer private flood coverage with a personal property limit of up to $875,000 for those insureds with building coverage. Alternately, your client could consider an NFIP policy combined with an insurance product that enhances the limits of the NFIP policy by up to $5,000,000 for both building and contents.

Agents should keep in mind that the NFIP and private flood policies have different ways of determining property value. NFIP contents coverage is actual cash value minus depreciation, which uses a FEMA formula to determine value. Private flood offers replacement cost on contents coverage. As an example, if a three-year-old TV is damaged in a covered flood claim, NFIP will reimburse a portion of the TV’s value. With private flood, contents coverage is for replacement cost value. That’s a big difference.

Q. Does your client have a pool?

If your client has a swimming pool, it’s understandable that he or she would want coverage for post-flooding clean-up. Homeowners may assume that the NFIP covers swimming pool clean-up, but this is not the case. The NFIP does not provide coverage for swimming pools.

NFIP policyholders with flood-damaged pools can be left having to address the problem and cover expenses themselves. Moreover, repairing or cleaning up a damaged pool is no easy task. Cleaning up a swimming pool is, at best, exhausting and tedious if the homeowner does the cleanup themselves, and at worst, expensive if they hire an outside company to perform the work.

Some of the steps involved in the process to fix a pool include:

• Pool draining
• Tending to pump damage
• Repairing or replacing flooded electrical equipment

So, how can your clients help protect themselves?  One option is to choose private flood insurance.  Some insurance products provide policyholders the option for coverage that includes up to $1,000 for swimming pool clean-up that can help policyholders with the potential hassle and expense of dealing with a flood-damaged pool.

Q. Does your client want to compare options apples-to-apples?

Discussing flood insurance options with clients—especially first-time homebuyers—can be a challenge. You’re likely introducing them to policies they haven’t heard of before. When comparing policy features, it is just as important to take note of what flood insurance policies don’t cover in addition to what they do.  For instance, The NFIP excludes pool coverage, additional living expenses, replacement cost on contents and, in many cases, food spoilage. However, private flood insurance policies often have these features available.

Having coverage for living expenses can truly make a difference when people have a loss. For instance, if a homeowner has an NFIP policy and he or she must evacuate the home because of damage, the cost for a hotel is the homeowners responsibility and the homeowner must pay for food.

Many people experiencing a flood don’t have a lot of extra money because most of their clothes, toiletries and living essentials may be in their home.  With private flood insurance coverage, some policies provide up to $5,000 to cover housing on a covered claim while a policyholder’s home is being repaired.

Final thoughts

As an insurance agent, you can advise your clients on the real risk flooding poses and which coverage may best fit their needs, but ultimately the choice is theirs to make. Not sure if your client would prefer NFIP or private flood coverage? You should quote both policies to them.  Give two examples and explain the coverage. The agent needs to know what they’re talking about. It’s imperative to explain the coverage, what’s included, what’s excluded in the flood policy, and if there is a coinsurance penalty. Explain the differences and let your clients choose. Primarily, I recommend private flood insurance on the agency side. I have found that the higher limits and coverages of private flood solutions were much more appealing to my clients. Helping my clients secure coverage that makes a difference in their lives should a flood happen, is something I have always cherished.

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[1] e.g., EZ Flood

[2] e.g., Aon Edge Excess Flood