8.4 National Flood Insurance Program (NFIP)
The National Flood Insurance Program (NFIP) is a federal program that makes flood insurance available to eligible property owners, renters, and businesses. The program is administered by the Federal Insurance and Mitigation Administration (FIMA), which operates under the Federal Emergency Management Agency (FEMA). Through the NFIP, the federal government helps support the availability of flood insurance and pays covered flood claims according to the terms and limits of the policy. This program is important because standard property insurance policies typically exclude flood damage.
Flood insurance policies may be purchased through the National Flood Insurance Program (NFIP) or through private insurance companies that participate in the NFIP’s Write Your Own (WYO) Program. Under the WYO Program, participating insurers issue and service NFIP flood insurance policies in their own names, but the coverage is backed by the federal program.
Although licensed insurance agents and brokers may assist applicants with obtaining NFIP flood insurance, they generally do not have authority to bind coverage directly on behalf of the NFIP. Instead, coverage must be issued according to NFIP rules, procedures, and effective-date requirements.
Insurance producers who sell, solicit, or negotiate flood insurance are often required to complete an approved 3-hour flood insurance training course before transacting flood coverage. This training helps producers understand NFIP eligibility rules, coverage provisions, policy limits, exclusions, rating procedures, and the role flood insurance plays in protecting property owners from flood-related losses.
To participate in the National Flood Insurance Program (NFIP), a community located in a flood-prone area must adopt and enforce an approved floodplain management program. These communities are referred to as participating communities or eligible communities.
When FEMA identifies a community as being located in a flood-prone area, the community generally has 1 year to apply for participation in the NFIP. If the community does not join within that time period, it may become ineligible to participate in the program.
This requirement is important because NFIP flood insurance is only available for property located in a participating community. Therefore, if a property owner lives in a community that does not participate in the NFIP, the property owner cannot purchase an NFIP flood insurance policy, even if the property has a high risk of flooding.
The National Flood Insurance Program (NFIP) maps communities into flood zones. These flood zones are used to identify the level of flood risk in different areas and to help determine flood insurance rating and eligibility.
One important type of flood zone is a Special Flood Hazard Area (SFHA). An SFHA is an area identified by FEMA as having a higher risk of flooding. Properties located in an SFHA may be subject to the federal mandatory purchase requirement.
Under federal regulations, a property owner must maintain flood insurance when the property is located in an SFHA and the owner has a mortgage or loan from a federally regulated or federally insured lender. In these situations, flood insurance is required in order to obtain, renew, extend, or modify the loan.
In most cases, NFIP flood insurance does not become effective immediately. Coverage generally begins 30 calendar days after the applicant has completed the application and paid the required premium.
This waiting period is important for insurance producers and applicants to understand. A property owner should not wait until flooding is expected or already occurring to purchase coverage, because the policy will usually not provide protection until the 30-day waiting period has passed.
NFIP Definition of Flood
Flood insurance policies provide coverage for direct physical loss to insured property caused by flood. Covered property may include the insured building, the insured’s personal property or contents, or both, depending on the coverage selected.
For NFIP policies, a flood is defined as a general and temporary condition in which normally dry land is partially or completely covered by water. To meet the NFIP definition, the flood must affect either 2 or more acres of the insured’s land or both the insured’s property and at least one adjacent property.
This definition is important because not every water-related loss qualifies as a flood under an NFIP policy. The loss must meet the policy definition before flood coverage can apply.
Under an NFIP policy, the inundation of normally dry land may be caused by several types of flood-related events. These include:
- Overflow of inland or tidal waters, such as storm surge or a tidal wave caused by a hurricane
- Unusual and rapid accumulation or runoff of surface water, such as heavy rainfall that collects faster than the ground or drainage systems can absorb it
- Mudflow, which occurs when water-saturated soil moves like a flowing liquid
- Collapse or destabilization of land along a shoreline, when erosion, waves, or currents exceed normal cyclical levels and cause land to give way
These causes are important because they help determine whether a water-related loss meets the NFIP definition of flood.
Example
The NFIP definition of flood generally applies to water that comes from sources outside the insured property and is usually caused by natural forces. For example, flooding caused by storm surge, heavy rainfall, or runoff from surrounding land may meet the NFIP definition of flood.
However, NFIP flood insurance would not apply to every type of water damage. A loss caused by water originating on the insured premises, such as an overflowing swimming pool, would generally not meet the NFIP definition of flood. This definition is specific to flood insurance policies and should not be confused with how other property insurance policies may define or exclude water-related losses.
Coverage
NFIP flood insurance provides coverage for direct physical loss to eligible residential and nonresidential buildings. These buildings may be used for personal purposes, such as a home, or for commercial purposes, such as a business property.
Building coverage is provided under Coverage A – Building Property. To qualify as an eligible building, the structure must be walled and roofed, located above ground, and affixed to a permanent site. Mobile homes may also qualify as eligible buildings when they are attached to a permanent foundation.
Coverage A may also provide limited coverage for a detached garage. However, coverage for detached garages is not as broad as coverage for the main insured building and is subject to policy limitations.
Coverage B – Personal Property applies to the insured’s contents. To be covered, personal property must generally be located inside a fully enclosed building.
It is important to note that coverage for buildings and contents located in a basement may be limited. When basement property is covered, the policy may restrict the types of property insured and the amount of coverage available.
The amount of coverage available for buildings and contents depends on the NFIP program status of the community where the property is located. NFIP communities may participate in either the Emergency Program or the Regular Program.
The Emergency Program applies to communities that are in the early stages of NFIP participation. These communities are working toward adopting and enforcing floodplain management standards, but the NFIP has not yet completed the final flood insurance rate mapping for the community.
The Regular Program applies to communities that have completed the required process and have adopted approved floodplain management measures. Once a community is in the Regular Program, higher coverage limits may be available than those offered under the Emergency Program.
Because coverage limits vary based on the community’s program status and the type of insured property, producers should verify which NFIP program applies before explaining available limits to an applicant. The maximum limits of insurance for buildings and contents are as follows:
Emergency Program Maximum Coverage
| 1- to 4-Family Dwellings | Other Residential Buildings | Nonresidential Buildings | |
|---|---|---|---|
| Buildings | $35,000 | $100,000 | $100,000 |
| Contents | $10,000 | $10,000 | $100,000 |
Regular Program Maximum Coverage
| 1- to 4-Family Dwellings | Other Residential Buildings | Nonresidential Buildings | |
|---|---|---|---|
| Buildings | $250,000 | $500,000 | $500,000 |
| Contents | $100,000 | $100,000 | $500,000 |
The NFIP uses different coverage forms based on the type of property being insured. Selecting the correct form is important because each form is designed for a specific category of eligible building and property exposure.
The Dwelling Form is used to insure 1- to 4-family residential dwellings, including single-family dwelling units located in a condominium building. This form may also provide coverage for the insured’s personal property.
The Residential Condominium Building Association Policy Form is used to insure residential condominium buildings. This form is typically purchased by the condominium association to cover the building itself.
The General Property Form is used for other eligible buildings, including multifamily residential buildings designed for 5 or more families, nonresidential buildings, and their contents. Nonresidential buildings may include commercial, business, or other non-dwelling properties.
Understanding these forms helps producers match the applicant’s property type with the correct NFIP policy form.
Flood insurance policies also include Coverage C – Other Coverages. This section provides limited coverage for certain expenses related to preventing, reducing, or responding to a flood loss.
Coverage C may include:
- Debris removal expenses, which help pay for the cost of removing covered flood-damaged debris
- Loss avoidance measures, such as reasonable costs incurred to protect an insured building from flood damage, including items like sandbags or temporary barriers
- Property removal expenses, which help pay reasonable costs to move covered property to a safer location to protect it from flood loss
When covered property is removed to protect it from flood damage, the property may be covered at another location for up to 45 days.
These coverages are helpful, but they do not increase the policy’s limit of liability. Instead, any payment made under Coverage C is included within the applicable policy limit.
Eligible policyholders in the Regular Program may also receive Coverage D – Increased Cost of Compliance.
Coverage D helps pay certain additional costs that may be required after a flood loss when the insured property must be brought into compliance with local floodplain management laws or ordinances. These requirements may involve changes such as elevating, relocating, demolishing, or floodproofing the building, depending on the applicable law or ordinance.
Coverage D provides up to $30,000 for eligible compliance costs. This coverage is designed to help policyholders meet community floodplain management requirements and reduce the risk of future flood damage.
NFIP flood insurance generally values covered property on an actual cash value (ACV) basis. Actual cash value means the cost to repair or replace the damaged property, less depreciation.
However, certain residential buildings may qualify for replacement cost loss settlement. Replacement cost coverage may apply to eligible 1- to 4-family residences and residential condominium buildings, if policy requirements are met.
This distinction is important because ACV and replacement cost can result in different claim payments. Under ACV, depreciation is deducted from the loss payment. Under replacement cost, the policy may pay the cost to repair or replace the damaged property with materials of like kind and quality, subject to the policy’s terms, conditions, and limits.
Deductibles
Each flood loss is subject to a deductible. The standard minimum deductible is typically $1,000 per occurrence. The deductible applies separately to each type of covered property. This means one deductible applies to Coverage A – Building Property, and a separate deductible applies to Coverage B – Personal Property, if both coverages are involved in the same flood loss. For example, if a flood damages both the insured building and the insured’s contents, the insured may be responsible for a separate deductible for the building loss and another deductible for the personal property loss.
Example
Assume an NFIP flood policy has the standard $1,000 deductible. A flood damages both the insured dwelling and the insured’s personal property.
Because the deductible applies separately to building coverage and contents coverage, the insured would have a $1,000 deductible for the dwelling loss and a separate $1,000 deductible for the contents loss. As a result, the total deductible applied to the claim would be $2,000.
Calculation: $1,000 building deductible + $1,000 contents deductible = $2,000 total deductible.
Exclusions
NFIP flood insurance contains important exclusions. Certain types of property are not covered, even when flood damage occurs.
Examples of property not covered by the NFIP include:
- Money and securities
- Lawns, trees, shrubs, plants, and growing crops
- Livestock
- Wharves, piers, bridges, docks, and other structures located on or over water
- Wells and septic tanks
NFIP policies also exclude indirect losses. Indirect losses are financial losses that result from the flood but are not direct physical damage to covered property. Examples include loss of use, additional expenses caused by being unable to occupy the property, and business interruption losses.
This distinction is important because NFIP coverage is designed primarily to insure direct physical flood damage to eligible buildings and contents, not every financial consequence that may result from a flood.
Write Your Own (WYO) Program
The Write Your Own (WYO) Program is a cooperative arrangement between FEMA and participating private property and casualty insurance companies. Under this program, approved insurers may write, issue, and service NFIP flood insurance policies in their own company names.
Although WYO insurers use their existing insurance operations to administer flood insurance business, the policies remain part of the NFIP. As a result, WYO companies must follow NFIP rules, regulations, coverage requirements, and rating guidelines.
This means that a flood policy issued by a WYO company is not a separate private flood insurance policy. It is an NFIP policy issued and serviced through a participating private insurer.
The Write Your Own (WYO) Program helps expand the availability of NFIP flood insurance by allowing participating private insurers to issue and service policies on behalf of the program. This increases the NFIP’s policy base and broadens the geographic distribution of flood insurance policies.
The WYO Program also improves service to policyholders because many applicants can work through familiar private insurers, agents, and brokers rather than dealing directly with FEMA.
Most NFIP flood insurance policies are handled through WYO companies. It is estimated that more than 90% of flood insurance policies in force are written and maintained by WYO insurers. The remaining policies are written and serviced directly by FEMA.