Financial Fact: Flood Insurance 101 — What to Know Before the Next Storm, Part 1

By Colin E. Nass, CFP^®, AEP^®, RICP^®, Director, Financial Planning 

What you’ll find in this article:

• What is flood insurance?
•  What does flood insurance cover?
• Who needs flood insurance?

Floods are one of the most common and costly natural disasters in the United States, yet many property owners remain unprotected against their financial impact. Standard homeowners and renters’ insurance policies typically do not cover flood damage, leaving individuals vulnerable to significant losses. This is where flood insurance becomes essential.

Flood insurance provides a critical safety net, helping to cover the cost of repairs and replacements when rising waters damage your home, belongings, or business. Whether you live in a high-risk flood zone or an area that experiences occasional heavy rainfall, understanding how flood insurance works and why it matters can help you make informed decisions to safeguard your property and financial future. In the first of a two-part series, we take a deep dive into this often-overlooked kind of insurance.

What is Flood Insurance?

Flood insurance is a specific type of property insurance that covers your home and/or its contents from losses directly caused by flooding. It is separate from standard homeowners or renters’ insurance, which typically excludes flood damage.

The National Flood Insurance Program (NFIP), managed by FEMA, offers flood insurance to help reduce the socioeconomic impact of floods. Coverage is available through private insurance companies to individuals and businesses in participating communities, for both residential and commercial properties.

Few people realize that just one inch of water can cause thousands of dollars in damage. However, not all water damage qualifies as a “flood.” Floods are considered a major natural event or “acts of God.” Examples of major natural events associated with flooding include:

• hurricanes
• heavy or prolonged rain
• melting snow
• coastal storm surges
• flash floods
• mudflows
• river and stream flooding
• closed basin flooding
• blocked storm drainage systems
• a levee dam failure

Damage caused by these events is not covered by standard homeowners’ insurance unless the property owner purchases a supplemental flood insurance policy. Standard homeowners’ policies usually cover interior water damage caused by issues like burst pipes but not flood damage from outside water sources like flooding.

What Does Flood Insurance Cover?

Flood insurance typically covers the cost to rebuild or repair your home or business. Depending on your policy, you may receive the actual cash value of your personal items. Coverage includes:

• The building’s foundation and structure
• The garage and other detached structures
• Built-in appliances including refrigerators, ovens and dishwashers
• Permanently installed carpeting and flooring
• Air conditioning units
• Furnaces
• Plumbing and electrical systems 
• Debris removal
• Personal property such as furniture, clothing, and electronics
• Up to $2,500 in valuables such as jewelry, art, and collectibles¹
• Essential systems in basements, such as water heaters and sump pumps
• Cleanup, such as water extraction and mold removal.²

Flood insurance does not cover:

• Damage from sewer lines
• Motor vehicles including cars, motorcycles, ATVs and watercraft
• Floodwater damage leading to mold or termites
• Landscaping
• Pools and hot tubs
• Patios
• Personal property or finished living spaces in basements, so review your policy and consult your insurer to understand your specific coverage. Consider additional riders or private flood insurance for broader protection.
• Monetary loss from not being able to conduct your business from home

Who Needs Flood Insurance?

Everyone lives with some flood risk; the question is how much. Flood zone maps are regularly updated to reflect changing weather patterns and environmental developments such as the building of new dams or levees.

If your property is in a federally designated flood zone, flood insurance is required for federally backed mortgages. Some private lenders also require coverage based on assessed flood risk. 

You can find your flood zone at floodsmart.gov.
 
Watch for part two of this series in the next issue of Tomorrow, where we’ll provide information about the cost of flood insurance, how it works and how private flood insurance compares to federal flood insurance.

1. Are Works of Art and Antiques Covered Under Your Flood Insurance? | Property Insurance Coverage Law Blog
2. What Does Flood Insurance Cover in a Basement? - Fact Sheet