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Private flood insurance is a viable alternative to the government-backed National Flood Insurance Program (NFIP). Consumers who live in a Special Flood Hazard Area (SFHA) can purchase a policy through a private insurer to satisfy 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 having your claim denied due to circumstances beyond your control—such as the company not having enough funds to deal with a disaster.
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 the other type of flood insurance policies, is that it receives no backing from the federal government. Federal coverage is paid out by the government, and is 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 insurer, on the other hand, is a for-profit company that either relies on a reinsurer or on money collected from premiums to pay out damages to claimants.
Currently, the Flood Insurance Agency is one of the best flood insurers available. The company is backed by Lloyd's of London and offers policies in 34 states. If you live in Florida, you may also want to consider TypTap.
Private flood insurance should not be confused with policies sold through the Write Your Own (WYO) Program. WYO exists to allow private insurance companies to write and service flood insurance in their own name. However, the insurance is still dictated and reinsured by the government, separating it from truly private flood insurance.
Should you use private flood insurance?
If you're not satisfied with the coverage limits offered by a federal policy or if you 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 flood insurance policy.
We recommend you obtain quotes from several sources, both private and federal, and compare your options by the cost of premiums and the stability of the insurer. The latter is important and reflects how confident you are that the company will be able to handle claims in the event of a major disaster. One way to make a determination of this is to look up the company's rating through such ratings agencies as A.M. Best, Fitch or, in the case of smaller companies, Demotech. You can ask the insurers themselves for these ratings.
Private Flood Insurance Pros and Cons
Advantages: Private flood insurance is customizable and often cheaper
Private flood insurers can offer consumers higher coverage, which is important to homes valued above $350,000. Policies provided by the NFIP typically have a maximum coverage of $250,000 for the structure of your home and a $100,000 on your possessions. In many cases, private insurers can provide you with twice that or more that level of coverage —especially if your property is located in an area with a lower flood risk. Therefore, if you need to maximize your coverage, private insurers are the only way to go.
Another key advantage of private flood insurers is that they provide coverage for a greater number of possessions. This is useful if you have furs, jewelry, fine art or collectibles that could be damaged by flood waters. The NFIP lumps all these items into a single category, and only pays you up to $2,500 in damages. A private flood insurer will be able to cover each of these items separately, up to much higher limits. Additionally, a private company may 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 with federal flood insurance.
Private flood insurance can also pay for living expenses in the event 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 insurers may be less expensive for many homeowners. According to a paper by Milliman, an actuarial and management consulting company, 77% of single-family homes in Florida could see cheaper premiums with private insurance. The same is true for 69% of households in Louisiana, and 92% of those in Texas.
However, prices vary greatly and not all homeowners will pay less by opting for private insurance. 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 insurers.
Disadvantages: Private flood insurers are new and untested
The biggest risk in getting private flood insurance is that the companies offering it are largely untested by major disasters. It's impossible to tell how reliable private coverage will be when it comes to paying out damages and handling claims should a natural disaster, such as a hurricane hit their policyholders.
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 it gaining wider acceptance. However, until more data is available on the performance of these companies, consumers will be taking on a higher risk with a private flood insurer than they will with the federal program.
Most mortgage companies require flood insurance for a home they are financing, and they may be unwilling to accept private flood insurance due to the reasons outlined above.