Do I Need a Flood Insurance Policy?
Flood insurance is a type of insurance that provides coverage for damage to property and possessions caused by flooding. Here are some important things to know about flood insurance:
- Flood insurance is not typically included in standard homeowners or renters insurance policies. In the United States, flood insurance is sold separately through the National Flood Insurance Program (NFIP), which is run by the Federal Emergency Management Agency (FEMA).
- The amount of insurance available from the National Flood Insurance program is limited as to the maximum dollar amount and benefits. The available policy limits from this program may not be enough to cover your losses. Oftentimes you will have the option of purchasing supplemental private insurance, and we recommend exploring that option with your insurance agent. Private insurance can potentially offer better benefits and higher policy limits.
- Flood insurance is available to homeowners, renters, and business owners, and it covers damage to buildings and their contents caused by flooding.
- The cost of flood insurance depends on a number of factors, including the property's flood risk, the amount of coverage needed, and the location of the property. The NFIP offers both building and contents coverage, and policyholders can choose to purchase either or both.
- It's important to note that there is typically a waiting period before a flood insurance policy goes into effect. However, if you purchase a property and are getting a residential a mortgage, that waiting period potentially may not apply. You should discuss the waiting period with your agent.
- Flood insurance policies have limits on how much they will pay out for damage. Policyholders should carefully review the terms of their policy to understand what is covered and what is not.
- It's important to remember that flood insurance only covers damage caused by a flood. Other types of water damage, such as damage from a burst pipe, may be covered under a standard homeowners or renters insurance policy. And Windstorm risks may be covered under a homeowners or renters policy, or may require a separate policy. You have to pay careful attention to this and discuss it with your agent.
- Homeowners in high-risk flood areas may be required to have flood insurance as a condition of their mortgage. Even if you don't live in a high-risk flood zone, it may be a good idea to consider purchasing flood insurance to protect your property in the event of a flood.
- It is important to be aware of any exclusions or limitations in your flood insurance policy. For example, most flood policies do not cover damage caused by sewer backups or groundwater seepage. Policyholders should review their policy carefully and ask their insurance agent any questions they have.
- Be aware of whether your policy is providing fair market value or replacement cost, which are two very different methods used to determine the value of property in an insurance policy.
Fair market value refers to the price that a property would fetch on the open market, in its current condition, at the time of the loss. It takes into account factors such as depreciation, wear and tear, and the overall condition of the property. In other words, it is the value that a willing buyer and seller would agree upon in an arm's length transaction.
On the other hand, replacement cost is the cost of replacing the property with a new item of similar kind and quality. It takes into account the cost of labor and materials required to rebuild or replace the property, as well as any changes in the cost of these materials and labor over time. If the policy uses replacement cost, the insurer will pay the full cost of replacing the property, up to the policy limit.
It's important to note that replacement cost coverage is more expensive than fair market value coverage, since it offers more protection to the policyholder.
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