Big changes are coming to the National Flood Insurance Program (NFIP) with the implementation of FEMA Risk Rating 2.0. Will there be changes to the coverage limits? The answer is No and Yes. That’s because nothing is ever simple when it comes to flood insurance or government programs. And when you combine the two? Yowzah! Here’s how FEMA 2.0 affects coverage limits.
New Maximum Limits
The new maximum limit for homeowner’s flood insurance is $250,000, that’s the same as the old limit. The new maximum for a business policy is $500,000 and that hasn’t changed.
But, while the dollar amount looks the same, the coverage is actually different. That’s because the basis for calculating the coverage has changed.
Now you see why it’s confusing!
Replacement Cost Value
With FEMA Risk Rating 2.0, the policy limit of $250,00 and $500,000 will now be based on replacement cost value (RCV). That’s not the value of the property – that’s what it costs to rebuild it after a loss.
And how is the RCV calculated? So glad you asked!
FEMA will take the information from the application and add insurance industry data connected to the address (like from the homeowner’s policy) to determine the RCV. If it’s a new structure or industry data isn’t available, then an appraisal may be necessary.
Impact of This Change
With the cost of building materials skyrocketing, a $250,000 RCV might not get you far if you must rebuild from scratch.
This might be a good time to investigate excess coverage. No, excess coverage doesn’t mean you have excess insurance, it means you have coverage for the excess above the base policy.
You can get this from private flood insurers.
How Excess Coverage Works
For example, let’s say you buy a house for $275,000. That’s the market value and just comparing that to the policy limit looks like there is only a $25,000 gap – right? Well, if it costs $325,000 to rebuild that same house because of rising lumber, labor, and other materials then the gap is really $75,000.
And as prices go up, the gap just gets wider.
But a private flood insurer will cover that gap with excess coverage. That’s a secondary policy to pick up where the NFIP left off. In the event of a complete loss, the NFIP policy pays the first $250K to rebuild and your excess coverage picks up from there.
What You Need to Do
If you have a home currently covered by an NFIP policy, talk to a Flood Nerd before it renews. Let’s see if the NFIP is still the best choice for you.
It may be better to move to the private market where you can insure the full replacement value or you may be better off in the government program and picking up an excess coverage policy.
Or you may be adequately covered, and no action is necessary.
We Flood Nerds not only love digging into these scenarios, but we are honest as the day is long. So you can trust us to provide you with all your options.