Private Flood Insurance: Is it Good Enough?

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Private flood insurance is an alternative to the government-backed National Flood Insurance Program (NFIP). People who live in a Special Flood Hazard Area (SFHA) can purchase a policy through a private company to meet federal mandates and mortgage requirements.

The major disadvantage of using a private flood insurance company is the risk of dealing with a longer claims process. Or you could have your claim denied due to circumstances beyond your control, such as the company not having enough funds.

What is private flood insurance?

Private flood insurance covers the structure of your home and its contents from water damage caused by a flood. What separates this option from other flood insurance policies is that it is not backed by the federal government. Federal coverage is paid out by the government and financed through taxpayer money.

Policies under the federal program are able to pay out flood damage claims for as long as the program receives funds. A private flood insurance company, on the other hand, is a for-profit company that relies on either an insurance policy of their own or money collected from premiums to pay out damages to claimants.

Currently, The Flood Insurance Agency is one of the best companies available. It's backed by Lloyd's of London and offers policies in 48 states. TypTap Insurance is also worth considering, but it's only available in 12 states.

Private flood insurance should not be confused with policies sold through the Write Your Own Program, which allows private insurance companies to write and service flood insurance in their own name. The insurance is still dictated and backed by the government, separating it from truly private flood insurance.

Should you get private flood insurance?

If you aren't satisfied with the coverage limits offered by a federal policy or can find reliable service at a more affordable rate, private flood insurance companies can be a good option. Ultimately, deciding between private and NFIP flood insurance comes down to what you're looking to cover with your policy.

Get quotes from several sources, both private and federal, and compare your options by the cost of premiums and the stability of the company. Stability is important and reflects how confident you can be that the company will be able to handle claims after a major disaster. One way to tell a company's stability is to look up its rating through agencies like AM Best, FitchRatings or, in the case of smaller companies, Demotech. You can ask the insurance companies themselves for these ratings.

Private flood insurance pros and cons

Pros

Cons

  • Covers higher dollar amount

  • Covers greater variety of things
  • May be less expensive in some areas
  • New and untested
  • Must meet certain requirements to be accepted by some lending companies

Advantages: Private flood insurance is customizable and often cheaper

Private flood insurance companies can offer higher coverage, which is important for homes valued above $350,000. NFIP policies typically have a maximum coverage of $250,000 for the structure of the home and $100,000 for possessions. Often, private companies can give you much more coverage, especially if your property is in an area with a lower flood risk. So, if you need to maximize your coverage, private companies are the only way to go.

Another key advantage of private companies is that they cover more possessions. This is useful if you have furs, jewelry, fine art or collectibles that could be damaged by floodwaters. The NFIP lumps all of these items into a single category and only pays up to $2,500 in damages. A private flood insurance company can cover each item separately, at much higher limits. A private company may also be able to rearrange these limits to closely match what you have in your home. Because the NFIP follows a much stricter standard policy, such customization is not available.

Private flood insurance can also pay for living expenses if your home becomes uninhabitable. This type of coverage is typical of regular homeowners insurance policies but is not included in flood insurance sold by the federal government.

Private companies may cost less for many homeowners. According to a paper by Milliman, an actuarial and management consulting company, 77% of single-family households in Florida could get cheaper premiums with private insurance. The same is true for 69% of households in Louisiana and 92% in Texas.

However, prices vary greatly, and not all homeowners will pay less. The same study found some homeowners' policies could cost twice as much as those from the NFIP. The best course of action is to shop around and compare quotes from both federal and private flood insurance companies.

Disadvantages: Private flood insurance companies are new and untested

The biggest risk of private flood insurance is that the companies offering it are largely untested by major disasters. It's impossible to tell how reliable they'll be when it comes to paying out damages and handling claims after a natural disaster, such as a hurricane.

Until 2014, private flood insurance was extremely rare. While it still represents only a sliver of total flood policies, private insurance is becoming more popular due to new regulations that have paved the way for wider acceptance. However, until more data is available on the performance of these companies, you'll be taking on a bigger risk with a private company than with the federal program.

Most mortgage companies require flood insurance for a home they are financing, and private flood insurance must provide at least the same coverage available through an NFIP-backed program to meet the requirements.

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