Flood insurance

Flood insurance denotes the specific insurance coverage against property loss from flooding. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowlands, floodplain and floodways that are susceptible to flooding.

Nationwide, only 20% of American homes at risk for floods are covered by flood insurance. Private insurers are unable to insure against the peril of flood due to the prevalence of adverse selection, which is the purchase of insurance by persons most affected by the specific peril of flood. In traditional insurance, insurers use the economic law of large numbers to charge a relatively small fee to large numbers of people in order to pay the claims of the small numbers of claimants who have suffered a loss. Unfortunately, in flood insurance, the numbers of claimants is larger than the available number of persons interested in protecting their property from the peril, which means that insurers are unable to cover their costs in flood insurance.

In certain flood-prone areas, the Federal Government requires flood insurance to secure mortgage loans backed by federal agencies such as the FHA and VA. However, the program has never worked as insurance, because of adverse selection. It has never priced people out of living in very risky areas by charging an appropriate premium, instead, too few places are included in the must-insure category, and premiums are artificially low." ^[2] The lack of flood insurance can be detrimental to many homeowners who may discover only after the damage has been done that their standard insurance policies do not cover flooding.

Flooding is defined by the National Flood Insurance Program as a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or two or more properties (at least one of which is your property) from: Overflow of inland waters, unusual and rapid accumulation or runoff of surface waters from ANY SOURCE, and mudflows.

This can be brought on by landslides, a hurricane, earthquakes, or other natural disasters that influence flooding, but while a homeowner may, for example, have earthquake coverage, that coverage may not cover floods as a result of earthquakes.