According to the Federal Emergency Management Agency (“FEMA”), only one inch of water in a property can cause more than $25,000 in damage. According to NOAA, in the past five years, there were eight one billion dollar or more flood disaster events causing approximately $35.3 billion in damage. Flooding is a peril that is typically excluded from personal and commercial property insurance policies. Instead, flood insurance is an important risk management tool agricultural producers should consider to protect their real and personal property from damage caused by a flood event. This article will discuss the National Flood Insurance Program (“NFIP”), which provides the majority of flood policies in the United States.
Types of Policies
Congress passed the National Flood Insurance Act in 1968, which established the NFIP. FEMA, a division of the Department of Homeland Security, administers the NFIP. However, unlike other FEMA disaster programs, flood insurance is not a loan and any claim payments do not have to be repaid. Additionally, most other disaster assistance programs require the damage to be caused by a federally declared disaster, which in many instances, flooding is not a federally declared disaster. Flood insurance does not require the flooding disaster to be federally declared before claim payments can be made. Instead, the purpose of NFIP is “both to offer primary flood insurance to properties with significant flood risk, and to reduce flood risk through the adoption of floodplain management standards.” Consumers who own or rent property in a participating community, which are communities that have agreed to implement floodplain management regulations, or on federal land are eligible to purchase NFIP policies.
To purchase a NFIP policy, you can contact your insurance agent (the same agent who writes your home/farm/auto policies), or find participating providers here. Purchasers can choose from several deductible options. Deductibles range from $1,000 to $10,000 on residential properties and $1,000 to $50,000 on non-residential properties. If you choose a higher deductible, you are assuming more risk, so the premium is typically lower. The standard policy is for a one-year term, which means that premiums must be paid yearly to keep the policy in effect. Premiums are re-evaluated by NFIP every year, so the premium can increase or decrease every year. These NFIP policies will be discussed in more detail in this blog post.
However, a private market has also developed policies that are not issued through the NFIP program. These policies may provide higher limits or additional coverage beyond the options available from FEMA/NFIP. The premiums in the private market can be higher or lower than NFIP depending on the specific property. Private market options will not be further discussed in this post, as they are very company specific and situation dependent. Landowners interested in policies in these types of policies should contact their insurance agent for more information.
Flood Insurance- Mandatory or Optional?
Congress requires all federally regulated or insured lenders to require flood insurance on properties located in high-risk flood zones. In other words, potential property buyers who are financing the building(s) by a mortgage are required to purchase flood insurance on certain pieces of property. However, coverage for contents is also available, which will be discussed below. To identify those properties, FEMA has created flood maps of the United States, which can be found on its website. High risk flood zones are identified with an “A” or “V”. Purchases of property within those zones are considered high risk and require the purchase of flood insurance to obtain a federally backed mortgage. If flood insurance is required but not purchased, the lender is required to obtain coverage for the property on the borrower’s behalf and charge the borrower for the cost of the premium and fees.
Landowners who are not required to purchase flood insurance may be more willing to roll the dice and obtain a policy after a major event is predicted but before it occurs. However, this is could easily lead to disaster, because NFIP policies typically become effective only after a thirty-day waiting period. An exception to this is for flood insurance that is purchased through the mortgage/loan process, as discussed above. In most cases, as long as the application and payment are received within the required timeframe, the policy will become effective as of the date of the loan closing.
Flood Zones
The FEMA flood zone designation for property is important to determine whether flood insurance is required, but can also be relevant in determining building requirements for agricultural structures that may later be built on the piece of property. In order to be a “participating community” for the purposes of the NFIP, communities must agree to abide by a series of FEMA requirements for areas designated in high-risk areas. One of those policies, Floodplain Management Requirements for Agricultural Structures and Accessory Structures, outlines requirements for individuals involved in regulating, planning, designing, and constructing agricultural structures and accessory structures in high risk areas. As defined in the policy, an agricultural structure is a structure used exclusively in connection with the production, harvesting, storage, raising, or drying of agricultural commodities and livestock. In other words, the designation of a potential property can have an impact not only on the flood insurance that may be required upon purchase, but also on the future usage and function of the property.
NFIP Policies
Like all insurance policies, how words are defined can make a significant difference. For example, NFIP defines flood as:
- A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (one of which is your property) from:
- Overflow of inland or tidal waters;
- Unusual and rapid accumulation or runoff of surface waters from any source.
- Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined in [1.a.] above.
This is important because if the damage is caused by flooding that falls outside the scope of this definition, NFIP will not provide coverage. For example, backup of sewers or drains would not be covered by NFIP unless the backup was proximately caused by a covered flooding event.
See the dwelling and general property policy forms for a list of definitions.
Buildings
The current maximum amount of building coverage for a residential[1] building is $250,000. For a non-residential building, such as a silo or enclosed equipment shed, that maximum is raised to $500,000. The maximum contents coverage available for a residential building is $100,000. The maximum contents coverage available for non-residential buildings is $500,000.
NFIP only allows one building per policy, so if an agricultural operation has multiple separate buildings and chooses to insure each building against flood damage, multiple flood insurance policies will need to be purchased. For example, if a farm has a home, grain bin, and machinery shed, purchasers will have to choose which of the buildings should be covered. If the purchaser wants coverage on more than one building, additional policies will be required.
Vehicles/Equipment
NFIP draws a distinction between vehicles that are licensed for use on public roads and vehicles such as farm equipment that are not. NFIP policies do not cover damage to passenger vehicles or others licensed for use on public roads. Instead, consumers can purchase comprehensive coverage on those vehicles through an automobile insurance policy. That comprehensive coverage would also include coverage for flood damage. However, for NFIP policies that have contents coverage, NFIP does provide coverage for some farm vehicles, such as tractors and combines, in some situations.[2] Non-motorized implements, such as air seeders or scrapers, would not be covered under any NFIP policy.
However, equipment that falls outside the scope of the limited coverage in the flood policy may qualify for coverage under an equipment floater policy on the private (non-NFIP) market. Some equipment floater policy forms include coverage for flood damage, or an endorsement can be purchased to provide flood coverage.
Livestock
NFIP policies specifically exclude coverage for animals. However, some specialty livestock or poultry mortality policies that may be purchased on the private (non-NFIP) market provide coverage for livestock or poultry death caused by drowning.
Additional Exclusions
Some types of property are ineligible for coverage, including several that are relevant to agricultural property owners. NFIP policies do not provide coverage for growing crops. However, harvested crops located inside a covered building, such as grain in a grain storage building, would be covered as contents if contents coverage is purchased on that building. Further, NFIP policies do not provide coverage for underground structures such as wells or septic systems.
Additionally, NFIP will not provide coverage for buildings or contents that are used for the manufacture or distribution of marijuana, because it is still classified as a Schedule 1 controlled substance. Buildings or contents used to manufacture or distribute hemp, however, would be eligible for coverage because hemp is not a controlled substance.
Further, unlike other property insurance policies, NFIP policies do not provide coverage for loss of income or loss of use. For example, if the property owner needs to rent a house while their house is being rebuilt from flood damage, the NFIP policy will not provide coverage for this additional expense. Alternatively, if a winery tasting room must close while the building is being repaired after flood damage, the loss of income would not be covered under the NFIP policy. However, some flood insurance policies through the private (non-NFIP) market can offer loss of use or loss of income coverage.
Conclusion
According to FEMA, between 2014 and 2018, over forty percent of NFIP flood insurance claims were filed by property owners outside high risk flood zones. All properties have at least a minimal risk of flooding and property owners should consider whether flood insurance should be a part of a risk management programs for their properties.
To read the 2022 National Flood Insurance Program Manual, click here.
[1] Residential buildings are defined by FEMA as single family homes, mobile/manufactured homes, and 2-4 family buildings.
[2] The NFIP policies provide coverage for self-propelled vehicles stored inside the insured building, such as tractors or combines, that are not licensed for use on public roads and that are mainly used to service the described location in the policy.