Personal Lines Flood Coverage: It's the Words, Stupid
Timothy O'Brien | May 10, 2013
In an effort to keep Bill Clinton's 1992 presidential campaign focused and on message, lead strategist James Carville hung a sign inside campaign headquarters using just these three words: "The economy, stupid." Seemingly overnight, journalists seeking a pithy headline began inserting "It's" and replaced "economy" with the issue du jour but continued to employ Carville's provocative use of "stupid."
More than 20 years later, I borrow Carville's technique to urge readers to examine the all-too-common practice of focusing far too much consumer attention on the limits of coverage of an insurance coverage offer—the numbers—rather than the actual words used in an insurance policy that determine the protection that is (and is not) being provided. After all, if we are ever going to help consumers make well-informed decisions on managing their risks, shouldn't we begin by placing a lot more focus on the importance and meaning of the words that determine the protection provided by the insurance contracts we have to offer? This article examines the often-overlooked details of the coverage that is available to protect personal property from flood damage.
Anyone who has ever assisted consumers with a flood loss has likely been exposed to the assertion that insurers hide behind the "policy fine print" to deny coverage to restore much of the damage that has been sustained. It seems as if the media and many consumers use the cynical and inaccurate label "policy fine print" to reference any section of an insurance policy that results in a disappointing outcome after an uncovered loss. As insurance professionals, we know that insurance policies are complex legal contracts that do not always make it clear the details of the coverage that is and is not provided. We also know from experience that common coverage issues arise after a flood that are vulnerable to being labeled as examples of policy fine print post-loss.
This article seeks to remind readers of the critical importance of making consumers aware of the words that limit the protection provided by flood insurance, provides suggestions on how to help consumers better understand the losses that are and are not covered, and highlights flood insurance solutions that are sometimes available to replace or supplement traditional coverage available through the National Flood Insurance Program (NFIP). By improving our ability to convey these important points and create more realistic coverage expectations, we may be able to diffuse at least some of the "policy fine print" assertions the next time the media use them to unfairly indict our industry.
Establishing a Better Starting Point
Before and after each major flooding event, the media confuse the public, however unintentionally, with misinformation concerning insurance protection from flood. For example, many news reports suggest that at least some homeowners insurance policies provide coverage for flood losses by offering words to this effect: "flood damage is not typically covered by a homeowners insurance policy." Even more remarkably, these oddly parsed words appear on the official website of the NFIP. Equivocating in this way is not helpful and may explain why a study by the National Association of Insurance Commissioners concluded that a full one-third of consumers believe flood damage is covered by a standard homeowners policy. Although a few select insurers can endorse a homeowners insurance policy to include protection from flood damage, we need to make it clear to the public that no unendorsed homeowners policies available in the United States automatically provide flood coverage. (If readers are aware of any homeowners policies that automatically include coverage for flood, please share this information on IRMI's Personal Lines Insurance Forum on LinkedIn.)
The media also reinforce the common myth that only a limited amount of home and contents flood coverage can be purchased by citing the maximum coverage limits available through the NFIP. Our industry needs to become much more active in making consumers aware that, in addition to the $250,000 dwelling and $100,000 personal contents coverage limits available through NFIP, significantly higher limits or "excess flood" coverage can be purchased through select private insurers. It is astounding how many consumers assert after a flood that they were "never made aware" that higher limits of flood protection were available for purchase. If only a few these consumers were truly not made aware, our industry can and must do better. While it seems there are considerable industry efforts promoting the importance of securing flood insurance through the NFIP, shouldn't we be just as active making the public aware that increased coverage limits are available through excess flood insurers?
Next: Help Consumers Explore Options
Once the popular misconceptions have been addressed, it is important to make consumers aware that there are at least several private insurers offering residential flood insurance coverage, if only for some consumers, as either an alternative or a supplement to the NFIP program. This author is aware of private placement flood coverage available through the following insurers: ACE, AIG, Chubb Group of Companies, Fireman's Fund, Lexington, and Lloyd's. Additionally, a few insurers have developed the ability to offer difference-in-conditions endorsements to qualifying homeowners policyholders to greatly enhance the limited protection provided by NFIP policies, including PURE High Net Worth.
A quick review of the many important coverage enhancements that can be secured through private insurers helps explain the importance of making consumers aware of private placement alternatives to the coverage offered through NFIP. To make the comparison easier, the insurers that offer private placement flood insurance have gone to considerable effort to document the coverage enhancements they provide that are not available from the NFIP. Figure 1 contrasts a sample of the enhanced protection made available by a private insurer with coverage provided by NFIP.
Flood Coverage Provided by a Private Insurer versus the NFIP
| Coverage | NFIP | Private Insurer |
|---|---|---|
| Definition of Flood | Flood must affect two or more acres or two or more properties | Damage to a single location under two acres is eligible for coverage |
| Maximum Dwelling Limit | $250,000 | $10,000,000 |
| Maximum Contents Limit | $100,000 | $5,000,000 |
| Loss Settlement for Secondary Homes | Actual cash value | Replacement cost |
| Additional Living Expenses | Not covered | Covered as part of dwelling limit |
| Other Structures | 10 percent of dwelling limit for detached garages only | Other structures (not just garages) covered as part of dwelling limit |
| Basement Property Coverage | Coverage limited to drywall, plumbing, electrical wiring, and traditional basement utilities | Up to the $250,000 provided within the dwelling limit |
| Basement Contents Coverage | Extremely limited and only for certain appliances | Up to the $100,000 provided within the contents limit |
| Expenses for Property Removed | $1,000 | $10,000 |
| Expenses for Preventative Measures | $1,000 | $10,000 |
| Business Property | $2,500 | $25,000 |
Yet another private placement option is available through the National Catastrophe Insurance Program (NCIP), a Web-based property insurance facility available through Poulton Associates, with headquarters in Salt Lake City, Utah. Coverage can be packaged through NCIP to include protection from flood, earthquake, and landslide, or unbundled and provided as flood only. Unlike the NFIP, which places strict limits on the maximum amount of coverage available, the NCIP flood program requires policyholders to insure the dwelling 100 percent to value and applies an 80 percent coinsurance clause. As an alternative to the insurers targeting only the affluent market, the NCIP program is available for owners of traditional homes with a modest replacement cost as well as those living in high-valued residences.
Certain Underwriters at Lloyd's of London insure policies underwritten through the NCIP facility. The NCIP site provides access to this great 1-page document that contrasts NCIP's flood coverage with the flood coverage available through the NFIP. I have contacted quite a few veteran insurance professionals who, like me, were not previously aware of the very robust coverage available through NCIP but were very happy to learn about it. While the risks of landslide and earthquake vary regionally, how many consumers are aware that a homeowners policy also excludes protection from these risks? If one-third of consumers do not understand that the risk of flood is excluded, one can only imagine how many more are unaware that these two risks are also not covered.
Unlike NFIP, the insurers offering private flood insurance underwrite each offering carefully and are better able to develop rates that are intended to pay future claims and earn a profit. Private coverage offerings are available on an admitted and/or nonadmitted basis. Unlike coverage available through NFIP, the terms, conditions, and availability of coverage from private insurers vary considerably, and gaining a close understanding of the many subtle differences among insurers can be a real challenge. Not surprisingly, heavy losses from Superstorm Sandy have caused several insurers to reevaluate how and even whether they will continue to provide flood protection. The most important aspect of making consumers aware of flood insurance through private insurers is quite simple: in very many instances, some form of private flood insurance coverage is available, and such programs provide broadened and/or increased limits of protection and an improved ability to help consumers avoid uncovered flood losses.
NFIP Offers Great Insights for Consumers
Just once, I would like to ask a reporter railing about the "fine print" of an NFIP policy whether he or she ever thought to visit the great NFIP website and examine the large amount of impressive educational content available to help consumers better understand their flood insurance protection. The official website of the NFIP, Floodsmart.gov, offers consumers a lot of insightful information to better understand the risk of flooding and the protection that NFIP insurance policies do and do not provide. Insurance professionals looking for a clear and relatively concise explanation of the coverage terms and conditions of an NFIP policy should direct consumers to this four-page summary titled "National Flood Insurance Program Summary of Coverage." To illustrate the clarity provided by this document, consider the effectiveness of this section devoted to addressing the considerable confusion concerning coverage for flood damage to a basement.
General Guidance on Flood Insurance Coverage Limitations in Areas Below the Lowest Elevated Floor and Basements
Conclusion
Although the federal flood program collected more than $3.5 billion in premiums last year, in 4 of the past 8 years, the cost to pay all flood claims exceeded annual premiums. In 2005 alone—the year of Hurricanes Katrina, Rita, and Wilma—flood claims totaled $17.7 billion. Solving the many problems confronting the federal flood program is well beyond those of us who counsel consumers on managing their personal risks. Instead, we face a challenge that is arguably even more important but, fortunately, much more manageable: helping each insurance consumer we speak with understand that, while there is no fine print in a flood insurance policy, there are many policy terms and conditions that greatly limit the protection that is provided.
To accomplish this, we need to change our conversations by focusing less on the easy to explain yet often misleading numbers (coverage limits) and redirecting consumer attention to the far more important words that determine how coverage responds to different flood losses. By creating a more meaningful conversation, we can introduce previously unexamined coverage options that can often expand protection and reduce the risk that we will hear that "policy fine print" was used to deny claims.
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