Flood Insurance Fundamentals: Part 7

Flood Insurance Fundamentals: Part 7 is designed to build on a strong foundation for understanding your NFIP Flood Insurance policy

• In this installment we will address:
  • The coverages provided in the Standard Flood Insurance Policy (SFIP)
  • Detail the Limitations and Exclusions within the SFIP; and
  • Describe the Loss Provisions provided in the policy

We will illustrate the concepts by revisiting our case study that was introduced in Part 3. Let’s do that now! 

Case Study

• Our young couple purchased a two-story home with a basement and a detached garage in Miles City, MT, located in an AE flood zone
  • The house, built in 1975, had already experienced damage from two previous floods in 1978 and 2011
  • Six months after their purchase, in early April, ice jams formed at the confluence of the Tongue and Yellowstone Rivers, causing widespread flooding
  • The floodwaters inundated the first floor of their new home with a foot of water
  •  The couple was devastated, now what?

Our couple, like most people, did their best to prepare, but when the unexpected happens, they wonder, ‘What happens now?

To navigate the next steps, they must understand their policy

The Standard Flood Insurance Policy (SFIP)

• The NFIP’s Standard Flood Insurance Policy (SFIP) comes in three flavors:
  • The Dwelling Form
  • The General Property Form
  • The Residential Condominium Form

The Dwelling Form

• The NFIP’s Dwelling Form provides building and or personal property coverage for specific building occupancy types:
  • SingleFamily Home
  • Single-Family Residential Unit within a:
    1. Residential or non-residential condominium building
    2. Non-Condominium residential or non-residential building, e.g., apartment building or residential cooperative building 
    3. Townhouse or Rowhouse building
  • Two-to-Four Family Building
  • Residential Manufactured/Mobile Home

The General Property Form

• Just like the Dwelling Form, the NFIP’s General Property Form also provides building and or personal property coverage for specific building occupancy types:
  • Non-Condominium Residential Buildings with five or more units
    • Apartment buildings
    • Co-operative buildings
    • Dormitories
    • Assisted living facilities
  • Non-Residential Buildings
    • Office buildings
    • Schools and Churches
    • Factories and Warehouses
    • Agricultural buildings
    • Restaurants

The Residential Condominium Building Association Policy

The residential Condominium Building Association Policy Form is a little different from the other two

It provides building and, if purchased, contents coverage for commonly owned property

• There are some requirements to qualify for this form:
  • It is issued to a residential condominium association
  • The condominium buildings must have 75% or more of the total floor area dedicated to residential use
  • It must be purchased on behalf of an association and unit owners
  • It is the only NFIP policy form with a co-insurance clause

Now that we understand the three options for the Standard Flood Insurance Policy, let’s explore the coverage each one provides

The Four Coverages of SFIP

The Standard Flood Insurance Policy is a single peril property policy meaning, it will pay for direct physical loss by or from flood and that’s it

• There are four coverages in the SFIP:
  • Coverage A: Building Property
  • Coverage B: Personal Property
  • Coverage C: Other Coverages
  • Coverage D: Increased Cost of Compliance

To begin, we must grasp the NFIP’s definition of a building

What Qualifies as a Building

• Before diving into coverages, let’s clarify what the NFIP considers a building:
  • A structure that is walled and roofed
  • It must be affixed to a permanent site
  • It must be principally above ground level

Coverage A: Building Property Explained

• For a structure to qualify for Coverage A, it must have:
  • Two or more outside rigid walls
  • A fully secured roof
  • Be affixed to a permanent site
  • Resistance to flotation, collapse, or lateral movement
  • At least 51% of Actual Cash Value (ACV) above ground level

While the coverage limits and specific details may vary depending on the form and occupancy type, Coverage A is a fundamental component of all SFIPs, providing protection for the building structure itself

Special Considerations for Different Building Types

The NFIP recognizes various building types, each with specific requirements for Coverage A eligibility. Let’s examine these in detail:

For Manufactured/Mobile Homes & Travel Trailers

• To be Eligible These Must Be:
  • Affixed to a permanent foundation
  • Not supported by wheels or axles
  • Anchored in Special Flood Hazard Areas (SFHAs) to resist flotation, collapse, or lateral movement

For Buildings Under Construction

• NFIP allows for issuance of SFIP before building is walled and roofed and
  • Offers coverage while work is in progress except when:
    • Construction is halted for more than 90 days
    • Lowest floor, including basement floor of a non-elevated building or lowest elevated floor of an elevated building, is below BFE
  • The building deductible is doubled until walled and roofed
  • Covers materials and supplies while contained in an enclosed building on premises or adjacent to the premises

For Additions and Extensions

• The NFIP covers additions and extensions attached to and in contract with the building, by means of a:
  • Rigid exterior wall
  • Solid load-bearing interior wall
  • Stairway
  • Elevated walkway
  • Roof

Note: At your option, additions and extensions connected by any of these methods may be separately insured

For a Detached Garage

• At the Policyholder’s Option and under the dwelling form only:
  • 10% of the building coverage can be applied to a detached garage
  • There is no additional coverage
  • It reduces building limit of liability

Note: This option does not apply to any detached garage used or held for use for residential, business, or farming purposes

For Building Property

The NFIP defines building property as any building material or component that is fixed in place and part of the structure, enclosure, or building systems

Building property (Coverage A) is covered in all three Standard Flood Insurance Policy (SFIP) forms for all building occupancies

The following is not a complete list of covered Building Property:

Awnings, canopies	Fire sprinkler systems	Permanently installed cupboards, bookcases, cabinets, paneling and wallpaper
Blinds	Walk-in freezers	Plumbing fixtures
Built-in dishwashers	Furnaces and radiators	Pumps and machinery for operating pumps
Built-in microwave ovens	Garbage disposal units	Ranges, cooking stoves and ovens
Carpet permanently installed over unfinished flooring	Hot water heaters, including solar water heaters	Wall mirrors, permanently installed
Central air conditioners	Light fixtures	Refrigerators
Elevator equipment	Outdoor antennas and aerials fastened to buildings

Coverage B: Personal Property (Contents Coverage)

All three SFIP offer Coverage B – Personal property coverage

Remember, Coverage A and Coverage B are purchased separately and have separate deductibles regardless of the SFIP Form

• There are some nuances between SFIP Forms:
  • Dwelling Form: If personal property is purchased, the SFIP insures:
    • Personal property inside a building
    • At the described location (inside a building)
  • General Property/RCBAP: If personal property coverage is purchased, the SFIP insures:
    • Personal property inside a building
    • The building must be a fully enclosed insured Building

The Case Study Review

Our young couple qualified for and purchased a NFIP flood insurance policy using a Dwelling Form

They purchased the maximum limits of both the Building coverage (Coverage A – $250,000) and Personal Property Coverage (Coverage B – $100,000)

The recent flooding damaged personal property in the detached garage

Under the SFIP Dwelling Form, the detached garage is a building at the described location

Personal property in the detached garage will be covered in the same manner as personal property that is located in the residence

Coverage B for the General Property Form

• This form allows for two possible ways for personal property to be covered:
  • Household Personal Property: Represents typical household property of a residence
    • Property belongs to the insured or to a member of the insured’s household
    • Property belonging to a guest or domestic worker may be covered at the insured’s request
    • Property belonging to others that the insured may be legally liable for if damaged or destroyed by flood
  • Other than Household Personal Property: Represents personal property used in a business setting
    • Furniture and fixtures
    • Machinery and equipment
    • Stock
    • Other personal property owned by the insured and used in the insured’s business

Note: Under the General Property Form, coverage will be either for household personal property or other than household personal property, while within the insured building, but not both

The Case Study: In the Basement

To continue the discussion from a flood loss and coverage standpoint, we will review flood damage to our young couple’s basement

Portions of the basement are finished with an office and a rec room area included

Significant damage occurred in the basement and our beleaguered young couple are wondering what is covered and what is not

Items Damaged in the Basement

Desk and chair	All major mechanicals
Computer and printer	Appliances, including a refrigerator
Television and stereo	Electrical outlets
Pool table	Sump pump
Carpeting	Other personal items
Wall paneling

To understand what is covered and what is not, we need to recall how the NFIP defines basements

Basements Are Defined As

Any area of the building, including any sunken room or sunken portion of a room, having its floor below ground level on all sides

Coverage A Applied to Basements

Coverage A (Building Coverage) for basements under the National Flood Insurance Program (NFIP) applies to specific items in basements, regardless of the flood zone

For post-FIRM enclosures in Special Flood Hazard Areas (SFHAs), similar coverage restrictions apply

In Basements Coverage A Applies To:

Central air conditioners	Non-flammable insulation in a basement
Cisterns and the water in them	Pumps and tanks used in solar energy systems
Unfinished drywall (walls, ceilings) in a basement	Stairways and staircases (attached to building)
Electrical junction and circuit breaker boxes	Sump pumps
Electrical outlets and switches	Water softeners and chemicals in them, water filters and faucets installed as integral part of plumbing system
Elevators and related equipment	Well water tanks and pumps
Fuel tanks and fuel in them	Utility connections for items on this list
Furnaces and hot water heaters	Footings, foundations, posts, etc., required to support building
Heat pumps	Clean-up

Coverage B Applied to Basements

Coverage B (Personal Property) for basements under the National Flood Insurance Program (NFIP) is very limited and applies to three specific items in basements, regardless of the flood zone

For post-FIRM enclosures in Special Flood Hazard Areas (SFHAs), similar coverage restrictions apply

• If a policy holder has purchased personal property coverage the following three items are covered in a basement:
  • Portable or window air conditioning units
  • Clothes washers and dryers
  • Food freezers (other than walk-in) and food in any freezer
    • Does not cover a refrigerator

Coverages C: Other Coverages

• Under Coverage C there are four Other Coverages:
  • Debris Removal
  • Loss Avoidance Measures
  • Condo Loss Assessment
  • Pollution Damage

Debris Removal

• The SFIP pays the expense to remove:
  • Non-owned debris on or in insured property
  • Debris of insured property anywhere
  • Value of labor based on Federal minimum wage

Note: This coverage does not increase the Coverage A or Coverage B limit of liability meaning the additional coverages provided under Coverage C are included within the overall policy limits for Coverage A and Coverage B rather than being separate or additional amounts of insurance

Loss Avoidance Measures

• The SFIP pays the expense for:
  • Sandbags, supplies and labor (up to $1,000)
  • Property removed to safety (up to $1,000)
  • Value of labor based on Federal minimum wage

Note: This coverage does not increase the Coverage A or Coverage B limit of liability and no deductible applies to either loss Avoidance measure

Condo Loss Assessments

• The SFIP pays the expense for:
  • Condominium loss assessments (Dwelling Form):
    • Assessed to policyholder by condo association
    • Up to the Coverage A limit of liability

Note: This coverage does not increase the Coverage A or Coverage B limit of liability

Pollution Damage

• The SFIP pays the expense for:
  • Pollution Damage (General Property Form)
    • $10,000 maximum limit
    • Does not include testing or monitoring unless required by law or ordinance

Note: This coverage does not increase the Coverage A or Coverage B limit of liability

Coverage D: Increased Cost of Compliance (ICC)

The final coverage in the SFIP is included to help policyholders cover the costs of bringing their flood-damaged properties into compliance with current floodplain management regulations

SFIP pays for complying with state or local floodplain management law or ordinance

• ICC coverage helps fund four types of compliance activities:
  • Elevation: Raising the building to or above the flood elevation level adopted by local ordinance.
  • Relocation: Moving the building out of the floodplain to a safer location.
  • Demolition: Tearing down and removing the flood-damaged building.
  • Floodproofing: Implementing certain measures to make the building resistant to flood damage (only available for non-residential structures)
• Eligibility requires:
  • Substantial damage
    • The building must be damaged by flood to the extent that repairs will cost 50% or more of the building’s pre-damage market value
    • Some communities may have a lower threshold for substantial damage, which would also qualify
  • Repetitive loss
    • The building must have suffered flood damage on two occasions during a 10-year period
    • The cost of repairing the flood damage, on average, must equal or exceed 25% of the building’s market value at the time of each flood
• ICC Limit of Liability is $30,000
  • The ICC Limit of Liability of $30,000 does not add to the limits of liability for Coverage A
  • The $30,000 ICC coverage is effectively a sublimit within the overall Coverage A limit
  • ICC claims are filed separately from regular flood damage claims

Now that we’ve reviewed the coverages, let’s shift our attention to the exclusions

Exclusions

• The SFIP will not provide coverage for certain losses  Losses that are not provided for include:
  • Loss of revenue or profits
  • Loss of access
  • Loss of use
  • Loss from interruption of business or production
  • Additional living expenses

Examples of Property Not Covered (Partial list only)

Personal property not inside a building	Land, land values, lawns, trees, shrubs, plants, growing crops or animals	Buildings and their contents if > 49% of ACV is below ground
Building, and contents in it, located entirely in, on or over water	Accounts, bills, coins, currency or other valuable papers	Fences, retaining walls, seawalls, piers, docks, etc.
Open structures, including a boathouse in, on, or over water	Underground structures and equipment, including wells, septic tanks, septic systems	Aircraft, watercraft or their furnishings and equipment
Recreational vehicles	Underground structures and equipment, including wells, septic tanks, septic systems	Hot tubs and spas that are not bathroom fixtures
Self-propelled vehicles or machines licensed for public road use	Containers and related equipment, such as tanks containing gases and liquid	Swimming pools and their equipment

Important Exclusions to Know

• SFIP does not pay for losses for:
  • Water or water borne material:
    • Sewer and drain backups: This refers to water that flows backwards through plumbing systems into the insured property. It’s often caused by clogs or system overload, not necessarily by flooding
    • Sump pump failures: When a sump pump can’t keep up with water inflow or malfunctions, leading to water accumulation in basements or crawl spaces
    • Seepage or leaks: This covers gradual water intrusion through walls, foundations, or other parts of the structure. It’s often related to groundwater issues or poor waterproofing
  • Damage from the pressure or weight of water
    • This exclusion typically applies to damage to basement walls, foundations, or other underground structures caused by the pressure of water pushing against them
    • It can also include damage from the weight of accumulated water on roofs or other parts of the structure
    • This type of damage is often associated with saturated soil around a building or rising groundwater levels

Exception

Unless there is a flood in the area and the flood is the proximate cause of one of the excluded items:

• Proximate cause: This legal term means the primary or direct cause of damage. In this context, the flood must be the main reason for the otherwise excluded damage
• Flood in the area: There must be a general condition of flooding in the geographical area, not just isolated water issues on the insured property
• Overriding exclusions: If a flood directly causes sewer backup, sump pump overflow, seepage, or damage from water pressure, these typically excluded events may become covered
• Burden of proof: The policyholder may need to demonstrate that the flood was in fact the proximate cause of the damage
• Case-by-case basis: Each claim is evaluated individually to determine if the exception applies

More Gems For the Vault

Here’s the Things to Remember About this Discussion:

• The Standard Flood Insurance Policy has three policy forms:
  • Dwelling Form
  • General Property Form
  • Residential Condominium Building Association Policy Form
• Each SFIP policy form consists of four major coverage areas:
  • Coverage A – Building Property
  • Coverage B – Personal Property
  • Coverage C – Other Coverages
  • Coverage D – Increased Cost of Compliance
• Building and Personal Property coverage is limited in basements and certain elevated building enclosures

Whew, That Was a Flood of Information!

Well played, NFIP—you’ve got the upper hand!

I thought I could wrap up the Loss Settlement Provisions in this part, but it looks like we need a sequel

Consider this a teaser for Part 8, where we take a deep dive into the weighty but important subject of Loss Settlement Provisions

See you soon!

Armor Insurance Agency

Want to be protected from Floods?

Call: (406) 416-1096

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