A lot of people don’t realize that damage from floods is excluded in their homeowners insurance policy. That’s likely a big reason why a 2016 Insurance Institute of America survey showed that just 12% have flood insurance — many might think their homeowners policy covers them already.
So why isn’t it covered? After all, insurance is supposed to protect you from the bad things that can happen to your home, and a flood can be particularly devastating.
Before we go any further, it is important to know that your homeowners insurance does cover a lot of those bad things that can happen — including some that you might even think of as “flooding.” But there is a big difference, insurance-wise, between “water damage” and “flood damage.” Water damage, for example, is when a pipe bursts in your home. Your homeowners policy covers that. What isn’t covered is the type of flooding that occurs when a body of water outside your home overflows to a point where it enters your home.
A question of financial health
Flooding isn’t covered by standard homeowners policies because it simply doesn’t make financial sense for insurance companies. And it’s not just about profits — companies need to remain financially healthy in order to pay claims and provide the protection promised to policyholders.
Before 1950, homeowners insurance used to cover flooding, but over time, the astronomical losses incurred from floods became too much of a burden. And by the early 1960s, all private insurance companies stopped covering flood damage because the risk was too high. This forced homeowners to bear these losses, which was an untenable situation; it’s incredibly difficult, if not impossible, for the average homeowner to pay the entire cost of rebuilding their home.
What are your options?
The government eventually stepped in to offer a solution, providing disaster aid to homeowners and ultimately establishing the National Flood Insurance Program in 1968. Depending on where your home is located, you might be required to purchase flood insurance. And some lenders require it even in lower-risk areas: More than 20% of flood claims come from outside of known flood zones, according to the Federal Emergency Management Agency.
The government program is somewhat limited, however. It is available only in participating communities, and it offers only up to $350,000 in coverage — limits are $250,000 for the house structure and $100,000 for the contents of the house. That’s why many private companies also offer additional insurance, known as “excess coverage,” on top of the flood insurance the government offers.
Do you need flood insurance? If you’re not in an area where it is required, it still might be worth considering.