By Michelle Tomko
Living by the water has many rewards. But like most things in this world, those beautiful sunrises and long walks on the beach come at a premium – a flood insurance premium to be exact. Additionally, residents can find getting the right type of coverage from the right carrier isn’t always cut and dry.
There is also the paramount decision of whether to get a policy from the private market or one backed by a federal government program. According to Dawn Becker-Durnin, CSRM, with NFP Insurance with headquarters in Easton, Pennsylvania, the Flood Insurance market is one that is continually changing. The newest update, she explained, at the time of this article, currently surrounding the National Flood Insurance Program (NFIP) is a bill introduced on June 10, 2019 by ranking member of the House Committee on Financial Services, Congresswoman Maxine Waters (D-CA), titled H.R.3167-National Flood Insurance Program Reauthorization Act of 2019. “This bill is reauthorizing the NFIP until the end of the fiscal year of 2024 which is September 30th of that year,” said Becker-Durnin.
She went on to explain that “the bill includes increased budgeting for mapping, right to appeal and basis to appeal existing maps, increasing the Cost of Compliance from $30,000 to $60,000 as well as coverage for Cooperatives on the same terms as a condominium. Small loan exceptions to Mandatory Purchase Requirements from $5,000 to $25,000 as well as Frequency of Payment Collection amendment from annual to monthly installments. The bill also includes a Continuous Coverage provision allowing borrowers to leave the NFIP to purchase flood insurance privately with the ability to return to NFIP without incurring a penalty.”
Becker-Durnin is quick to point out that the provision is somewhat of a game changer. “The disadvantage to private flood insurance is it is not considered continuous coverage. You lose your grandfathered rate. Hopefully if this bill is passed, they are actually going to state that private insurance will be considered continuous coverage — which is a big deal,” she said.
Part of what makes flood insurance policies so hard to understand is that not everyone needs flood insurance, it is separate from the homeowners policy, and is the responsibility of whomever is on the master deed for an association. “Flood insurance is excluded under property coverage. If a typical condo association that has property coverage has a flood exclusion, you need to go and look at the mapping. Because if a particular condo is in a flood zone, a mortgage lender is going to require flood insurance. The duty of obtaining flood insurance falls on the condo association. Unit owners, even if they are responsible for the interior of their units, wouldn’t be able to purchase building coverage,” explained Becker-Durnin.
Becker-Durnin walked us through a typical protocol that she follows for someone buying flood insurance. “First we would pull a flood zone determination by address of the master deed,” she said. Interestingly enough, each building in the association has to be insured separately. “One building could be located a thousand feet away from anther building, and they could actually be in two different flood zones,” said Becker-Durnin. “Then depending on the rating, the premium is decided,” she explained. “The association gets the flood insurance through NFIP. We ask for the elevation certificate. We bring that back to the flood insurance underwriter. They plug all the elevation numbers into their modeling system and come back with their rate quote.”
If $250,000 per unit is not enough to replace the property, purchasing “excess flood” insurance through the private sector may be the best option. “Excess flood means it’s over the primary flood. Instead of purchasing through NFIP, a community can go and obtain private insurance,” Becker-Durnin said.
Think you don’t need flood insurance? Becker-Durnin said that is worth rethinking. As only about 17% of buildings are insured. “For example, during Superstorm Sandy there were areas that were never flooded before. All of a sudden, they had flood waters. Those people were unlikely to be insured because their mortgage companies did not require it and/or they didn’t think their properties would flood,” said Becker-Durnin.
An extra insurance policy is sometimes a steep luxury to property owners. That’s where the NFIP steps in to keep affordable options open. “If NFIP didn’t have this program, communities possibly couldn’t afford flood coverage. Affordability of the insurance can be a real problem. It can actually bring down the value of a neighborhood and hurt resales,” Becker-Durnin added. “NFIP offers insurance for everybody. But of course the pricing is determined by which zone the building is located in and the elevation of the building,” she continued.
No matter how you choose to insure, it has to be for the entire cost to replace the structure. “Flood insurance is for the full replacement of the building. That’s what you need to insure for to avoid penalty,” said Becker-Durnin. “The maximum you can purchase through NFIP is $250,000 per unit with a Residential Condominium Building Association Policy (RCBAP).” However, according to Becker-Durnin “replacement costs on a flood could be higher than others because a property policy doesn’t typically cover foundations. If you have a ten-unit building and the replacement cost is $500,000 per unit, now you are only insuring fifty-percent of the building. If you have a flood, and you are not insuring the building to full replacement cost, the federal government will penalize you and pay out less.”
Much of the determination of premium is based on the elevation certificate. “An elevation certificate is done by a licensed engineer or architect to determine the height of the property above sea level. They have to do this for each building on a property. One building could cost more than the others if that building is lower in elevation or closer in proximity to the coast,” Becker-Durnin said.
Can a board opt to only insure some of their structures that are more of a risk? “The board can make that determination. You have to evaluate the risk. A building that never floods can flood,” she said.
As stated, there is a lot to consider when choosing between the NFIP program and private insurance. There are certainly pros and cons to both. Whether it’s getting a good rate or feeling confident your claim will be paid, according to Becker-Durnin, it’s a tough call.
For example say “your property insurance carrier, because you are in a low-risk area, is willing to include flood via endorsement on your policy. So you can now cancel your NFIP policy. There are a lot of pros and cons with that. One issue is that NFIP wasn’t willing to grandfather the rate. If you canceled and wanted to come back, the map may have changed and the rate could be very different than when you canceled the policy,” said Becker-Durnin.
She also mentioned that there is the possibility of saving money. “The advantage to private insurance is the premiums are typically less than NFIP. With private insurance you can purchase whatever amount you want. It just has to be the replacement cost of the building,” said Becker-Durnin. She went on to point out “if I have private insurance, I most likely don’t have to provide an elevation certificate. Someone can save a couple hundred dollars on having an engineer complete a flood elevation determination if one was not performed in the past”
Private insurance also affords a few extra perks. “Another thing is NFIP only gives about $30,000 for “increased cost of compliance” or ICC, which is the cost to elevate, demolish or relocate if a building is substantially damaged. Flood insurance in the private market can offer higher limits. Also NFIP does not offer coverage if you have to temporarily live somewhere else. If you have to go stay at a hotel, you’re paying for that out of your own pocket. NFIP does not pay for additional living expenses. They also won’t pay for the loss of assessments. There’s no business interruption coverage for that. Private flood insurance can give the additional living expenses and loss of income for the association, which is a big deal,” said Becker-Durnin.
While private insurance can be bound instantaneously if paid in full or over time, the NFIP has a caveat to that. “There’s a thirty-day waiting period with NFIP. The only time NFIP will waive the waiting period is if you have a mortgage closing and/or refinance of a mortgage. The annual policy premium through NFIP has to be paid in full,” said Becker-Durnin. “The private market can also give discounts based upon the type of construction. NFIP doesn’t give premium discounts based upon construction factors,” she added.
Can homeowners have both NFIP and private at the same time? “You can have both. But one is going to say the other is the primary,” said Becker-Durnin.
After all that, you may think private is the way to go. But Becker-Durnin cautioned that getting a policy from a business a private market, especially a non-admitted excess insurer, can lead to a difficult matter when it’s time to make a claim. “The lenders may not accept private insurers, because NFIP is backed by the federal government. Plus the NFIP program the rates are pretty stable,” said Becker-Durnin.