Water Damage and Homeowners Insurance: Environmental Trends are Transforming an Already Difficult Relationship

Background

The devastation wrought by Hurricane Sandy on the coastlines of New York and New Jersey demonstrated what many scientists and insurers had been predicting: changes in global climate patterns would produce an increase in extreme weather events and rising sea levels would create a potential catastrophe for many coastal regions.

Calling it a “defining challenge of our future,” New York City mayor Michael R. Bloomberg recently announced a massive $20 billion plan to build a network of flood walls, levees, and bulkheads along the city’s 520 miles of coast.

The effect of climate change is also affecting inland regions. In the mid-west, the incidence of severe weather events has increased. Tornadoes have annihilated townships; strong storms and heavy rain—often in record-breaking amounts— are becoming regular occurrences. According to the National Oceanic and Atmospheric Administration (NOAA), this year Iowa had its wettest spring on record, with nearly twice the average precipitation, while Illinois, Michigan, Minnesota, North Dakota, and Wisconsin each had a “top-ten” wet spring.

Chartwell Bulletins have discussed water damage in the past; however, against this backdrop of increasingly volatile weather patterns, it is a topic worth revisiting.

Water in the Home: An Insurance Primer

Water in the home is generally a result of two basic causes:

1. Rising floodwaters entering the home from the outside,

2. Overloading of the sewer and drain system, causing wastewater to back up inside the house through the drains, toilets, baths and showers: this is known as “backup of sewer and drain.”

Flood insurance is intended to address the first cause. Here are some questions and answers about flood insurance:

Does my regular homeowners policy protect me against flood damage?

Almost certainly not. Flood damage is an excluded peril from virtually every standard homeowners insurance policy although not
always from the scheduled fine art coverage. Most fine art policies which schedule each item typically have no flood exclusion.

Where can I obtain flood insurance?

A federal program run by the Federal Emergency Management Agency (FEMA) has historically been the only provider of primary— the first insurance policy to respond — flood insurance for homeowners in designated high-risk flood zones. This program is called the National Flood Insurance Program (NFIP). To inquire about a flood insurance policy, homeowners should not contact the NFIP directly but should approach their insurance representative. Some private insurers including ACE, AIG, Chubb, Fireman’s Fund and PURE are now offering primary flood coverage for policyholders in low or moderate-risk flood zones that include enhancements for basement coverage and more policy-holder friendly occurrence triggers.

Do I need flood insurance?

Certain homeowners are required to have flood insurance. These are individuals who obtain secured financing (a mortgage) to buy, build or improve structures located in parts of the country known as Special Flood Hazard Areas (SFHA). Collectively, these areas are colloquially known as the “flood plain” but in reality, these areas are subdivided into over ten zones prone to flooding in varying degrees. Lending institutions which are federally regulated must determine if a structure is in a hazard area and if so, should require the borrower to obtain flood insurance for the structure. It is important to note that designated flood zone areas can change: a home that once was outside a SFHA flood zone may now be inside.

Then there are those who are not required to have flood insurance, but probably should. Sometimes a structure may be on the coast but not in a designated SFHA. A condominium owner may feel that being several floors above ground level is enough protection, however it is possible that a severe flood could damage the lower floors sufficiently for the building to be condemned. If flood was deemed the proximate
cause of the damage, a regular homeowners or condominium insurance policy may refuse to pay. FEMA estimates that 25% of all flood claims occur in low-to-moderate risk areas; storm surges from Hurricane Katrina in some places sent a wall of water up to 30 feet high rushing more than a mile inland – beyond the designated flood areas.

What does an NFIP policy cover?

An NFIP policy is essentially a dwelling policy, which is a limited policy that only provides for physical damage to the structure and some damage to the contents. The current maximum limit for the structure is $250,000 and for contents it is $100,000. If it is your main residence, coverage is usually on a replacement cost value (RCV) basis; otherwise, it is the more restrictive actual cash value basis (ACV). Some private insurers will provide excess limits above the primary NFIP policy, or the primary flood policy purchased from a private insurer.

What is not covered by the NFIP policy?

Flood damage to basements and items stored there is typically not covered, other than for some mechanical equipment and appliances that cannot easily be moved. Primary flood insurance offered by private insurers like ACE, AIG, Chubb, Fireman’s Fund and PURE include provisions for flooding in basements. Keeping valuable items in a basement —flood zone or not— is generally not a good idea.

How can I obtain an NFIP map?

You can visit the FEMA Map Service Center here: FEMA Flood Map Service Center

The NFIP has its own web site, http://www.floodsmart.gov/floodsmart, which is an excellent resource for flood information.

Wind or Water Damage?

Damage from severe wind events that include flooding can present loss evaluation problems. As noted above, homeowners insurance policies generally exclude flood, but may cover wind damage. For a home that has been battered by wind and water, the insurance company loss adjustor will have to determine what damage, if any, is covered by the homeowners policy. While this distinction is often clearer in practice than might be thought, buying flood insurance for homes exposed to this double threat is a prudent step.

Backup of Sewer and Drain

The second major cause of water in the home is backup of sewer and drain. Many standard, unamended, homeowners insurance policies exclude losses caused by “backup of sewer and drain”. For example, some insurance policies generally do not cover backup of sewer and drain unless it is specifically requested. The coverage can be added by endorsement but often only for a limited amount, usually no more than $10,000- $50,000. Insurance companies that specialize in the affluent market generally include backup of sewer and drain as part of their policies, with limits usually equivalent to the amount that the dwelling is insured for.

Summary

Homeowners unsure about their flood exposure should review the NFIP flood zone maps. If there is reason to believe your home could be flooded or your condominium building damaged in a flood, you should strongly consider buying primary NFIP flood insurance, and possibly buying excess flood limits. Consulting your insurance agent —who will have had much more experience in this area than you— is a good idea. Although the NFIP flood dwelling policy is lengthy, complicated, and provides what some may feel is limited protection for a sometimes significant premium, it is usually the only primary flood insurance available for homeowners whose property is at risk of flooding.

For back up of sewer and drain coverage, homeowners should check with their insurance agent to see if their homeowners policy provides any coverage, and if so, whether it is sufficient.

Chartwell Bulletins are produced by Chartwell Insurance Services, Inc., an independent insurance broker specializing in the personal asset protection of high net worth individuals.  Chartwell Bulletins address issues of general interest and since coverages vary by company and by state should not be taken as an interpretation of a particular policy or advice on any individual situation.

A representative of Chartwell Insurance Services will be pleased to discuss all aspects of your personal insurance.  
Contact:  Rebecca Korach Woan   312-645-1200 or rwoan@chartwellins.com