Flood insurance explained: a beginner's guide

Water is the most common cause of damage to a house and the one insurance treats most carefully. A burst pipe is covered by a homeowner policy. Rain through a wind-damaged roof is covered. Water that rises from outside and comes in at ground level, whether from a river, a wash, a street that filled up, a snowmelt-swollen creek or a debris flow off a burn scar, is not. That is flood, and it is excluded from every standard home, condominium and renters form in the country.

Flood is insured, if at all, by a separate policy, and the policy has its own vocabulary, its own valuation rules and its own waiting period. This guide explains what a flood policy defines as a flood, how the federal programme and the private market differ, what each part of the policy pays, and why the mapped zones that lenders use are a poor guide to actual risk in Arizona, Nevada, Utah and Idaho.

What a flood policy means by flood

The federal definition, which most private policies follow closely, is a general and temporary condition of partial or complete inundation of normally dry land from the overflow of inland or tidal waters, from unusual and rapid accumulation or runoff of surface water from any source, or from mudflow. Two features of that definition matter. The event must affect more than your property alone: a stated area of land or a neighbouring property must also be inundated. And mudflow, a river of mud carried by water, is a flood, while a landslide or a slope failure is earth movement and is excluded from both the flood and the home policy.

The distinction that comes up most in the Southwest is between surface water and everything else. Rain that pools against the foundation and seeps into a slab-on-grade house is flood. Water that backs up through a floor drain because the municipal storm sewer is overwhelmed is sewer backup, which the flood policy covers only when it is caused by a flood, and the home policy covers only by endorsement. When both policies exist, the adjusters decide which responds; when only the home policy exists, the answer is usually neither.

The federal programme and the private market

The National Flood Insurance Program writes most residential flood policies in the country through private insurers acting as its agents and through its direct servicing arm, on a standard form with maximum limits set by the programme. The programme now prices each property on its own characteristics, including distance to water, elevation, foundation type, rebuild cost and flood frequency, rather than on the mapped zone alone. A programme policy is available anywhere the community participates, which nearly every city and county in the four states does, and it cannot be cancelled by the insurer for claims.

Private flood carriers write on their own forms. They may offer higher limits than the programme allows, replacement cost on contents, coverage for additional living expenses, shorter waiting periods, and lower premiums on well-elevated properties; they may also decline a property, non-renew after a loss, or exclude things the programme covers. A lender that requires flood insurance must accept a private policy that meets its standards, but not every lender's staff know that. For a high-value house, or one where the programme's building limit is well below the rebuild cost, a private policy or a private excess policy above a programme policy is the usual answer.

Building and contents: two coverages, chosen separately

A flood policy has two parts with separate limits, separate deductibles and separate premiums, and you can buy either or both. Building coverage insures the structure, its foundation, electrical and plumbing systems, furnaces and water heaters, built-in appliances, permanently installed carpet over an unfinished floor, and detached garages up to a share of the limit. Contents coverage insures furniture, clothing, electronics, portable appliances, and rugs and curtains. A renter buys contents only. A condominium owner buys contents plus whatever the association's master flood policy leaves uncovered.

Valuation is the trap. Under the federal form, contents are always paid at actual cash value, meaning depreciated. The building is paid at replacement cost only if it is the insured's principal residence and the limit is at least a stated share of the rebuild cost or the programme maximum; otherwise the building is also paid at actual cash value. Suppose a house in Mesa takes two feet of water from a wash that jumped its banks, and the repair estimate is $60,000 for the structure and $25,000 for the contents. With a building limit that meets the replacement cost condition and a $2,000 deductible, the building claim pays $58,000. The contents, ten years old, are valued at half their replacement cost, so $12,500 less a $2,000 contents deductible pays $10,500. Round figures, but they explain why a private policy offering replacement cost on contents is worth pricing.

What the flood policy does not cover

The exclusions are narrower than a homeowner policy's, but each one has surprised someone.

• Additional living expenses, hotel and rent while the house is repaired, under the federal form. Some private forms include them.
• Basements and anything below the lowest elevated floor: the federal form covers only a short list of structural and mechanical items there and excludes finished walls, flooring and most contents. In Salt Lake City and Boise, where finished basements are common, this is the largest gap.
• Property outside the building: decks, fences, pools, landscaping, septic systems, wells and vehicles.
• Mould and mildew that could have been avoided by the owner, and damage from moisture or seepage that is not part of a flood event.
• Currency, precious metals, and valuable papers; and business property beyond a modest sublimit.
• Earth movement, including sinkholes, landslides and the settling of a foundation, even when caused by the flood.

Zones, maps and why they mislead in the desert

Flood maps divide land into zones by modelled flood frequency. A high-risk zone is where a federally backed mortgage lender requires flood insurance; a moderate or minimal zone is where it does not. The maps model rivers and coasts well and desert hydrology badly. An alluvial fan below a mountain front in Scottsdale or Henderson floods where the last storm happened to cut a channel, not where the map drew one. A wash that has been dry for a decade is still a wash. A subdivision downhill from a recent wildfire in the Idaho or Utah foothills is exposed to debris flows the maps do not show. And the mapped zone changes when the map is redrawn, which can move a house into a required-insurance zone at the next refinance.

The practical rule is to treat the zone as a lender's requirement and not as a risk assessment. If the house sits at the bottom of a slope, near a wash, on a street that ponds, or below a burn scar, the question of flood insurance is a real one regardless of the letter on the map, and outside the high-risk zone the premium is usually modest. An elevation certificate, a survey document that records the house's floor elevation against the modelled flood level, can lower the premium on a programme policy for a house in a mapped zone and is worth obtaining when a lender requires coverage.

The waiting period

A new flood policy does not take effect on the day it is bought. The federal programme imposes a waiting period before coverage begins, with exceptions when the policy is bought in connection with a mortgage closing or a map change, and private carriers set their own, often shorter, periods. The consequence is that a policy bought when the monsoon forecast turns serious, or when the snowpack starts melting fast in April, will not cover the storm that prompted it. Buy in the dry season, and keep the policy through it, because letting it lapse and rebuying restarts the clock.

How to use this

Find out three things about the house: where it sits relative to the nearest wash, creek, slope or burn scar; what its mapped zone is and whether the lender requires coverage; and what the rebuild cost is against the programme's building maximum. Those decide whether a programme policy, a private policy or a combination fits, and whether contents coverage is worth adding. We quote flood alongside the home policy for houses in Arizona, Nevada, Utah and Idaho. If the house sits on high ground far from anything that carries water, the analysis may say the risk is small, and we will say that too.