With the release of the FEMA draft flood maps, the FIRM office and board members are seeing a renewed interest in private flood insurance vs. the National Flood Insurance Program (NFIP). In this post we attempt to explain pros and cons of seeking out a private carrier.

Possible Advantages of Private Flood Insurance
Some of the features that might be found in some private policies could include:

  • Limits of coverage higher than those provided by the NFIP
  • Replacement cost loss settlement on all building losses
  • Replacement cost loss settlement on personal property
  • Enhanced coverage in basements
  • Ordinance and law coverage
  • Broader other structures coverage
  • Coverage for other structures, besides just a detached garage
  • Additional living expense on a policy covering homes
  • Business income and extra expense coverage might be available on commercial policies.
  • Fewer and/or more favorable deductibles
  • The “property not covered” list may be shorter than NFIP.
  • Elevation certificate may or may not be required be required.
  • No HIFAA surcharge of $25 or $250
  • Possibly lower rates

Possible Disadvantages of Private Flood Insurance
There are also, of course, possible disadvantages of a private flood policy and some of these include:

  • Coverage might not be as broad as the NFIP supported policies offer
  • There is no guaranty of renewal as exists with an NFIP policy–with an NFIP policy the insurer must renew coverage as long as the premium is paid.
  • The insurer may be weakly capitalized or new to writing such coverage. The idea of private flood insurance is very new and untested.
  • Lenders may be reluctant to accept the policy, or may totally decline to accept it.
  • The policy likely can be cancelled mid-term or non-renewed by the insurer for a variety of reasons as allowed via state statutes. That’s not the case with an NFIP supported policy.
  • You can possibly lose a subsidized rate and/or grandfathering by leaving the NFIP for a private insurer.
  • A surplus lines insurer that’s offering private coverage has no state guaranty fund to protect that insurer.
  • Rates could increase drastically, especially with a surplus lines insurer.
  • The insurer might leave the market and non-renew all policies.
  • The policy could contain unique exclusions and conditions.
  • Policy language, as these policies are new, is not standardized may be untested in court cases.
  • There is no ability to assign policy to new purchaser.

NFIP’s rule related to leaving and then wanting to return in the future.
The law states that, unless one leaves because a flood policy is no longer required by their lender, then upon returning to NFIP the policyholder is ineligible for a subsidized rate and would, instead, be required to pay the much higher non-subsidized rate. FEMA has not yet released guidance or an effective date for this provision, but it is entirely possible that policyholders who leave the NFIP for a private insurer could permanently lose subsidized rates. Even though those rates will continue to increase for the foreseeable future, they will do so predictably, as opposed to the private market where availability and affordability cannot be predicted.

Disclaimer: Information provided as educational only and is not intended to cover all situations. Please consult your insurance specialist.

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