NFIP versus Private Flood Insurance: Which Is the Better Flood Insurance?
When it comes to flood insurance, you have two general options: the national flood insurance program or private insurance. Get ready to learn more than you want to know about the difference between NFIP and private flood insurance. If you’re in a hurry – scroll to the end and just watch the video.
What is Better Flood Insurance?
Better Flood Insurance is home to the Flood Nerds. We are a flood insurance agency ONLY.
Unlike other insurance agents that are generalists, we don’t write auto or home policies – we only write flood insurance.
Flood insurance is a complex product and keeping up with the private and government markets is a full-time job if you do it right.
You’ll never catch a Flood Nerd writing an auto policy. If you do, they are an imposter…not a genuine Flood Nerd.
Flood Nerds shop all the options available in your state. We help you understand the difference between the NFIP and private flood insurance options. Better Flood Insurance is the only national flood insurance company that shops all viable options. That means we compare NFIP to private flood insurance options and always get THE BEST deal on flood insurance.
Here’s what you should know about the difference between the NFIP and private flood insurance.
What is the National Flood Insurance Program?
If you want to understand the difference between NFIP and private flood insurance, you’ve got to first understand the National Flood Insurance Program (NFIP or FEMA insurance).
The NFIP is administered through the Federal Emergency Management Agency (FEMA). Sometimes you will hear people call it the government option. That’s because for 50 years after the program was established in 1969 they held a complete monopoly on the market. The government option was the ONLY option. Because it was the federal government, they took a one-size-fits-all approach to insurance. It was like buying insurance through the DMV. Ugh!
For decades the NFIP has overcharged 50% of its policyholders and undercharged the other 50%. They were so ineffective they racked up $42 billion in taxpayer-funded losses.
Even Congress could see this was a problem.
So, in their infinite wisdom (ha!) Congress decided to enact the Write Your Own program in 1983. This allowed private insurance companies to sell NFIP policies at NFIP rates and somehow this was going to make things better. WHAT the FUDGE???
Flood insurance through State Farm, Allstate, Farmer’s, and other major insurance companies is just the NFIP policy sporting a spiffy new private insurance company logo. For a while, everyone pretended this was private flood insurance, but it wasn’t. It was just the wolf of the NFIP in the sheep’s clothing of a private insurance company logo.
Finally, in 2012 Congress had to act to shore up the sinking NFIP ship. And they finally realized a real private market solution was the best option for flood insurance. In the United States, the REAL private flood insurance market was open for business.
What is Real Private Flood Insurance?
While those NFIP resellers pretended to sell private flood insurance, a true market for private flood insurance opened.
These private insurers use modern technology and data to more accurately assess the actual risk of flooding. Since insurance is all about transferring risk, this more accurate data leads to more accurate premiums. So, for most people, the premiums drop.
The NFIP will write insurance for a property that floods every year or two. The private flood insurance market knows this is crazy. They mostly insure properties that haven’t flooded in 5 years.
There are currently over 40 private companies that provide flood insurance coverage in the US. Many of these are part of the Lloyds of London syndicate.
Real private flood insurance can save most buyers money. But you’ve got to understand the market and know the difference between a flood insurance reseller and real private flood insurance.
That’s where the Flood Nerds at Better Flood Insurance come in. We geek out on the ins and outs of flood insurance. Because we know the intimate details of flood insurance pricing, we can shop all the private options and then compare the price to what you can get through the NFIP.
NFIP and Private Flood Define Flood Differently
The NFIP and some private flood insurance companies define “flood” differently.
The NFIP definition says that the water must inundate 2 or more properties or 2 or more acres. This is a real problem if your home is the only one flooded or all your neighbor’s homes drain down to yours. They are high and dry and you are flooded and out of luck with the NFIP.
On the other hand, some private flood insurance policies use a more straightforward definition of flooding. You get coverage that clearly defines what must happen to activate a claim and leaves little or no space between the homeowner’s policy exclusion and the stand-alone flood insurance policy.
NFIP and Private Flood Insurance Provide Different Coverage
The coverage you get from the NFIP and the coverage you get from private flood insurance aren’t the same either.
To begin with, the NFIP only insures up to $250,000. Private flood insurance covers the amount of insurance you need. So, you can get $500,000 in coverage for a home through the private market but not through the NFIP. This is very important if your home is worth more than $250,000 or you have a mortgage higher than that amount.
Next, private flood insurance is like your homeowner’s insurance when it comes to the contents. Private flood lets you insure at replacement cost. The NFIP only offers depreciated costs.
And speaking of depreciation, when it comes to a second home or a commercial policy the NFIP only pays depreciated costs for repairs on these properties – not the contents – the structure itself! Yikes! That means most times, NFIP policies for second homes or commercial properties cost way more for way less coverage.
Some private flood companies will offer coverage for personal contents in the basement. The NFIP does not offer this coverage.
NFIP and the Private Market Figure Rates Differently
The private flood insurance market is fueled by innovative technology that combines ultra-accurate topography maps and complex algorithms to determine the actual risk of flooding. Private flood insurance companies use eye-in-the-sky satellite images, historic data, computer simulations, and other geeky things to more accurately assess flooding risks. That’s how they can save you money – they know the real cost of the risk. Now, let’s compare that to how the NFIP goes about how to figure insurance rates.
To start with, the NFIP relies on the Army Corps of Engineers, paper flood zone maps that can be 40 or 50 years old, private surveyors and engineers, and political pressure to determine the risk of flooding. Instead of high-tech, they use low-tech Flood Hazard Determination Certificates and Elevation Certificates.
These maps use letters like A, AE, V, and VE to indicate you are in a high-risk area. If your property is located on one of these zone maps then your lender likely will require you to purchase a flood insurance policy in order to get a loan for your home or commercial property. If your property is in a flood zone X map, then it is considered low-risk and you aren’t required to buy insurance. But too often, in a flood, these X maps experience flooding too.
How to Read a FEMA Flood Map
Here’s a sample of a flood map of an area in Wisconsin.
Any property in the light blue is in Zone A, a high-risk zone. The striped areas are the Zone AE areas and these are really high-risk! If your structure is in the high-risk area your lender will likely require you to have flood insurance. FEMA provides an online flood map lookup by address.
The Tan area is flood zone X which is a low-risk area. The lender is not likely to require flood insurance in that zone. That doesn’t mean it won’t flood. Many floods occur in low-risk areas, flood insurance is a good idea for these areas, it just isn’t mandatory.
Flood Zone Determination
To know for sure what zone the property is in, the lender gets a Flood Zone Determination (FZD). It looks like this.
NFIP Uses Elevation Certificates Too
The NFIP also looks at Elevation Certificates to determine the risk of flooding. But they will only look at an Elevation Certificate if you provide them one. How do you get an Elevation Certificate? Well you must:
Pay a land surveyor about $600 or more to survey your property and fill out the certificate
Ask the previous property owner if they have an Elevation Certificate.
The Elevation Certificate provides information about the topography of the property and the buildings on the property. It includes information such as:
Where HVAC/furnace and other equipment is located
Lowest area where outside soil touches the structure (lowest adjacent grade – LAG)
Highest place where outside soil touches the building (highest adjacent grade – HAG)
The best Elevation Certificates contain photos of the building and have photos of the inside too. Some Elevation Certificates can be 3 – 5 or more pages long. Flood Nerds love reading them!
Private insurance doesn’t rely on these certificates, but they do come in handy. So if you have one, always share it with your Flood Nerd!
An Elevation Certificate looks like this and provides the elevation of different areas around the property.
When the NFIP May Cost Less
There are times when the NFIP will cost less because the government will subsidize a portion of the policy premium. These times are few and far between, but Flood Nerds know how to sniff out these subsidies and help you take advantage of them.
In general, subsidized rates are in the low-risk flood zones. These are those properties that are in flood zone X.
Remember that in the NFIP half of the people overpay and half of the people underpay? Well, the subsidized policies are part of the half that underpay.
Flood Nerds understand when and where these subsidized policies are available and we can snag one for you if it is available. These government-subsidized policies generally cost less than private flood insurance because you and your fellow taxpayers are paying for the government subsidy.
Another time the NFIP may cost less is if the property and premiums are grandfathered in under an old map. If you are buying a property and the current owner has an NFIP flood policy they might have a grandfathered policy with a subsidy. If this is the case, Flood Nerds have the knowledge and skills to transfer their premium to you. It’s not as easy as it sounds, but Flood Nerds know how to pull this trick off.
Find Out the Cost Difference Between Government and Private Flood Insurance
Private Flood Insurance Is Usually Cheaper
Now you know how the NFIP figures premiums and when a subsidy might get you a cheaper rate. Subsidies are few and far apart. In general, private flood insurance is going to cost less.
In fact, the private flood insurance market almost always costs less – 20% to 50% less or even more.
There are over 40 private flood insurance companies providing flood coverage on the market today. Some are stand-alone companies and others are part of the Lloyds of London insurance syndicate. Syndicate may sound criminal, but it’s perfectly legal and it’s how insurance companies share risk – they spread it around.
Lloyds of London Private Flood Insurance
The largest syndicate for private flood insurance is Lloyds of London. Since they insure property all over the globe and the chance of the entire globe flooding at once is small, they can really spread out that risk!
Most Lloyds of London policies offer a lower premium for better coverages. And they don’t ask for no stinking Elevation Certificates to get a quote. But they do have different underwriting guidelines. That’s the mind-numbing kind of detail that gets a Flood Nerd excited.
See, not every Lloyds of London insurance company will take every property. Some can be rather picky about the risk they take on and may decline a property while another company may use different underwriting guidelines and find it acceptable. So, a property that doesn’t meet the underwriting guidelines by one company can be accepted by another.
And Flood Nerds know all the companies! Let’s look at just a few.
National Catastrophe Flood
This member of the Lloyds syndicate is really competitive, primarily in the A and AE flood zone.
Their policies offer limited coverage for contents in the basement. Remember the NFIP doesn’t cover basement contents. They offer loss-of-use coverage and this is really important. If your home is flooded, you probably won’t be able to live in it until it is repaired. You’ve got to live somewhere and that will most likely be a hotel. Loss-of-use coverage covers the cost of the hotel and meals until you can get back in your home. NFIP won’t cover a tent and a peanut butter sandwich. In addition, they offer replacement cost coverage; and can cover higher limits than the NFIP policy on a case by case basis.
National Catastrophe Flood doesn’t place a penalty on coverage for second homes like the NFIP does. They write both residential and commercial flood policies and can line item any other structures on your parcel. They will even write multiple properties on one policy.
Now National Catastrophe Flood can be a bit choosy about what risk they will accept. They usually pass on anything that has a prior flood loss, but will consider it if you disclose the flood on your application.
Overall, Flood Nerds give this company a big thumbs up. Oh, and the CEO is wicked smart, Flood Nerds admire brains like other people admire legs.
Another member of the Lloyds of London syndicate is Superior Flood. They issue solid coverage and are very competitive in the A and AE flood zones. Their policies offer the best coverage for basement contents and they offer coverage for replacement cost. Now the underwriters can be very picky about the properties they cover, but they can offer higher coverage and offers $2,000 limited loss of use and $2,000 limited coverage for other structures. Superior Flood writes both residential and commercial policies and they are very competitive on commercial insurance. On the downside, they may write coverage one year and then decline to renew the coverage the next year. If that happens, the Flood Nerds go to work and will shop your coverage again. The CEO is driving the industry forward and is a down to earth Ohio guy.
Chubb is the largest publicly traded property and casualty company in the world. They are part of the Lloyds of London syndicate and can be very competitive in the V flood zone. Their entry into the market is finally providing some relief to oceanfront properties. They only offer Replacement Cost coverage, so you can’t merely cover your mortgage amount. At this time, they only cover residential properties.
These aren’t the only Lloyds of London flood insurance options and some companies only do business in some states.
How Do You Know Which Coverage Is Best?