Changing weather patterns as well as a steep rise in building material and labor costs, due at least in part to the pandemic, should be leading property owners to ask their insurance agents two questions right now. First, do I need flood insurance? Second, do I have adequate replacement cost coverage today to rebuild my home or business property if it were destroyed?
Do I Need Flood Insurance?
If it rains where you live or work, it also can flood there—anytime of the year. Not only is coastal flooding becoming more frequent, but so, too, is inland flooding. Over the last 60 years, extreme rain and snow events in the U.S. have become more frequent, especially in the Midwest and Northeast. This trend is expected to continue.
According to the National Severe Storms Laboratory, flooding causes an average of $5 billion annually in damage. Property owners who never worried about flooding before should ask their insurance agent if they recommend a flood insurance policy.
Three important points to understand about flood insurance include the following:
1. A standard homeowners or businessowners policy doesn’t cover flood damage.
2. Flood insurance must be purchased separately.
3. Flood policies don’t take effect immediately. Normally there is a waiting period of between 10 and 30 days.
Flood Damage Versus Water Damage. Flood insurance covers both building property (e.g., drywall, pipes, electrical) and, to a lesser extent, personal property (e.g., furniture, appliances, clothing) that are damaged as a result of things like storm surge, river overflow, flash floods, runoff from heavy rainfall or snowmelt, and mudflows.
Water damage from things such as faulty appliances and leaky pipes, in contrast, is not considered flood damage, even if a home or business is flooded as a result. This type of water damage is covered by most homeowners and businessowners policies. Sewer backup or sump pump failure coverage (also called “water backup coverage”) isn’t automatically covered as part of all homeowners or businessowners policies, but an endorsement can be added to provide coverage.
Variables Impacting Flood Insurance Pricing.Just a few years ago, insurance carriers had to obtain all flood policies for their clients through the National Flood Insurance Program managed by the Federal Emergency Management Agency (FEMA). Today, private policies offer a second option that may be less expensive. An insurance agent can describe the pros and cons of each.
Insurers have traditionally used tools such as flood zone maps and elevation certificates (a document describing a building’s location and lowest elevation) to determine whether flood coverage is available and at what rates. In 2021, however, FEMA introduced a new pricing methodology that considers more flood risk variables, including flood frequency, multiple flood types, distance from water sources, and cost to rebuild the structure (construction type, foundation type, etc.). The agency is also including more third-party data sources and catastrophe modeling in its calculations.
According to FEMA, this new methodology allows the agency to distribute premiums more fairly across policyholders. That’s because new rates take into consideration the value of the property (e.g., the lower the cost to rebuild, the lower the rate) as well as the unique flood risk of each property.
Do I Have Adequate Replacement Cost Coverage Today to Rebuild?
Every property insurance policy contains a property limit of insurance. If an insured home is destroyed by catastrophic weather, the limit of insurance is used to reimburse the insured for the cost to replace the home. Unless a policy has been reviewed recently, a gap likely exists between the stated property value and the actual cost of rebuilding if something were to happen. This is due to the steep escalation of construction material costs (and shortages) and labor costs brought on at least in part by the pandemic.
Homeowners policies may contain language stating that the insurer will guarantee replacement cost if the home is damaged or destroyed by a covered peril. A policy also may include extended coverage (e.g., 20%, 50%, 100% above the policy limit) to restore or rebuild a home. Homeowners would be wise to review their coverage or contact their insurance agent as soon as possible to confirm that they are protected.
Business property policies, in contrast, contain no safety net. For example, if a property was valued and insured three years ago for $1 million but it actually costs $1.5 million to rebuild today, the insured must find a way to bridge the $500,000 gap. This is especially important for owners of small businesses to understand because their personal wealth often is at risk.
Hylant clients are welcome anytime to reach out to their service team member for a homeowners policy review or a small business property replacement cost estimate and recommendations. Others who have questions are encouraged to contact Hylant here.
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The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.
AUTHOR: Mark Holloway