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Understanding the Unique Facets of Flood Insurance: Policy Terms and Conditions Unique to Flood Coverage

Terms and conditions peculiar to NFIP policies have evolved, changed, and been added since the plan's formation in 1968. Many of these changes have result from inflation (such as increasing limits), some the result of actual problems, and still others the product of anecdotal evidence (such as the waiting period change). Several of these unique flood terms and conditions are highlighted in the following paragraphs.

Waiting Period

All new NFIP flood policies are subject to a 30-day waiting period (with some exceptions). This mandated waiting period applies to both direct policies and policies written through a Write Your Own (WYO) carrier. Tolling of the 30-day waiting period begins once the application and the estimated premium are received as follows:

From the date of the application if the application and premium payment are received within 10 days of the date on the application; or if the premium and application are mailed via U.S. Postal Service certified mail within 4 days of the application.
From the date of receipt at the NFIP if the application and payment are not received within 10 days of the date on the application; or if the premium and signed application are not mailed via certified mail within 4 days of the date on the application.

Note: The waiting period countdown does not begin until the estimated premium is received.

Losses in progress on the effective date are excluded from coverage. A delay in mailing the application and premium could be the difference between a flood loss being covered and being excluded.

Exceptions to the 30-day waiting period for individual or entity coverage are:

Renewals – No waiting period provided renewal premiums paid;
Loan closings – effective at the time closing papers are signed (no waiting period);
Revision or updates to a FIRM – 1-day waiting period during the 13 months following the revision; and
Properties subject to the post-wildfire exception. Coverage becomes effective immediately if the covered property experiences damage caused by flood that originated on federal land, post-wildfire conditions on federal lands caused or worsened the flooding; and the insured purchased the policy before the fire containment date or during the 60-calendar day period following the fire-containment date.

Thirty-day elimination periods also apply to endorsements requesting an increase in coverage or a decrease in the deductible. Requests for decreases in coverage or increases in deductible are processed immediately upon receipt.

Direct Loss Only

Standard flood insurance policies cover only direct losses suffered by the insured. There is no provision to pay indirect losses. A direct loss is the actual damage to the real and/or personal property resulting from a covered cause of loss (flood). Indirect loss is the increase in expenses or loss of income created by the direct loss.

Excluded are any additional living expenses incurred while the dwelling is being repaired, as well as any loss of income a business suffers due to the inability to occupy and/or operate the business. Any outlay not directly related to repair or replacement of the damaged property is an out-of-pocket indirect expense for the homeowner. Unrealized income resulting from flood damage is a business's out-of-pocket, indirect cost of a flood.

Deductibles

NFIP policies apply deductibles separately to each class of property insured. The insured pays two deductibles following a loss: one for the real property and a second for personal property.

Separate deductibles based on type of property insured is contrary to the homeowners' and the commercial property policies' application of the deductible. Deductibles in these common property policies apply to the loss, not the class of property. Thus, the insured is only responsible for one deductible regardless of the class of property damaged or destroyed rather than two as required by the NFIP policy.

Standard NFIP deductibles and rate credits for the various deductible options can be found on FEMA's website. Factors and credits are based on:

The flood zone,
A structure's status as Pre-FIRM or Post-FIRM,
The classification of the structure (residential, other residential, nonresidential), and
The type of property insured: building or contents.

Increased Cost of Compliance

Increased Cost of Compliance (ICC) found in Coverage D is mandatory on all three standard flood insurance policy forms in regular program communities. ICC coverage is not available for structures in emergency program communities or for individual units in a residential condominium association.

Communities which have adopted flood plain management requirements within their ordinance or law provisions may require certain structures to be altered or removed following flood damage. Such consequential expense is only available through Coverage D. ICC coverage will pay the additional costs to:

Elevate the structure as required by local code;
“Flood proof" the structure;
Relocate the structure; or
Demolish the structure.

The $30,000 ICC limit is paid in addition to the amount of direct flood damage. However, FEMA's payment will never exceed the maximum available coverage, even when ICC coverage is added. For example, the insured purchases the maximum amount of dwelling coverage available in the dwelling form—$250,000; if there is a $245,000 direct loss, the maximum coverage available under the ICC extension is $5,000, regardless of the total cost to comply with an ordinance or law. This explains why the premiums for ICC coverage decrease after the dwelling limit surpasses $230,000 for residential structures and $480,000 for nonresidential structures.

To be eligible for ICC coverage, the structure must meet one of two requirements (in addition to those previously discussed):

The structure must be a “repetitive loss structure" for which NFIP has paid a previous qualifying claim in addition to the current damage; or
The structure must sustain “substantial" flood damage (“substantial" is defined in a subsequent section).

Reduction in or Reformation of Coverage

Flood policies can be “re-formed" and the limits reduced after the loss if the premium paid is not sufficient to cover the amount of coverage requested. Such issues can result from various causes, including 1) the difference between the Base Flood Elevation (BFE) and the reference point is miscalculated, or 2) the completion of structural changes moving the reference point to a lower level (such as by enclosing the area under an elevated floor in a Flood Zone “A").

If the deficiency is discovered by or reported to FEMA prior to the loss, the insured is given 30 days to pay the difference between the 1-year premium paid and the correct policy-year premium based on actual rating information. However, if the discrepancy is found at the time of the loss, the insured is allowed 60 days to cover the difference in paid and actual premium for the last 2 policy years. The “2 policy year" requirement is found within the three standard coverage forms, however, NFIP rules state that the additional premium is only required for the current policy term (“This is an exception to the SFIP provisions requiring additional premium for the current and the prior policy terms.")

Potentially severe penalties apply if the insured does not or cannot pay the additional premium. Insureds unable or unwilling to pay the difference will see the limits on their policy reduced to match the amount of coverage available based on the premium paid.

Flood Series

This is one of a series of flood articles discussing and detailing the unique facets of the NFIP flood program. To continue researching the unique facets of the NFIP, visit any or all the links provided:

Read the entire series here.

Resources

First Published: August 23, 2021