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The Importance of Having Flood Insurance

Many homeowners might underestimate their risk of incurring flood damage - a mistake that could end up costing them thousands of dollars.

Throughout history, floods have caused serious devastation, resulting in damages that have reached into the billions.

In fact, the devastation caused by flooding can be so severe that the federal government will oversee disaster relief efforts when major flooding occurs. However, when the government steps in to assist in these emergencies, the tax payer is the one who gets hit with the bill.

In 1968, the United States Congress responded to the mounting flood losses and increasing disaster relief costs by establishing the National Flood Insurance Program, or NFIP, a program designed to assist property owners in financially insuring themselves in the event of serious flood damage.

Flooding Can Happen Anywhere

While individuals living in areas at high-risk for flooding, such as New Orleans, might understand the importance of carrying flood insurance, many communities underestimate their risk for flooding.

However, history has demonstrated that if it can rain, then it can flood. Even the desert-state of Arizona has experience serious flooding at least once every 10 years.

A flood is defined as a temporary condition in which two or more acres of normally dry land or two or more properties are inundated with water or mudflow. While a number of weather-related events, such as hurricanes or tropical storms, can cause flooding, other events, such as the inability of outdated infrastructure to handle rapid downpour of water, can lead to flooding as well. This scenario was the case when the levees broke in New Orleans after Hurricane Katrina hit in 2005.

When NFIP was originally established, the federal government estimated that only 5,000 communities were at risk for flooding. However, after studying the problem in greater depth, government officials discovered that more than 20,000 counties and towns were at risk of flooding to some degree.

Determining an Area's Risk Level

The NFIP takes into account several factors to determine a particular area's risk level for flooding:

  • rainfall,
  • river-flow and tidal-surge data,
  • topography,
  • flood-control measures, and
  • developmental changes.

Once these factors are analyzed, the NFIP places an area in one of three flood risk levels:

High-Risk Flood Area

A high-risk flood area has a 1 percent or greater chance of flooding in any given year, or a 26 percent change of flooding during a 30-year period. Owners of homes or businesses located in high-risk flood areas that have mortgages from federally regulated or insured lenders are required to carry flood insurance.

Moderate-to-Low Risk Areas

A moderate-to-low risk area is one that is still at risk for flooding but to a lesser degree than a high-risk area. Owners of homes or businesses located within a moderate-to-low risk area are not required to carry flood insurance even when they still have mortgages on the properties. While the risk of flooding is lower in a moderate-to-low risk area compared to a high-risk area, many experts recommend that residents still purchase flood insurance. These experts point to the fact that one out of every four flood claims, or 25 percent, stem from floods that occurred in moderate-to-low risk areas.

Undetermined-Risk Area

An undetermined-risk area represents a location for which the risk level for flooding has not yet been determined.