Flood Insurance part 3 - How flood insurance rates are calculated

Flood Insurance part 3 – How flood insurance rates are calculated

Flood insurance rates are based on what flood zone you are in, and in some zones, also depend on the elevation of your house.

Part 3 of a 4-part series: Part 1   Part 2   Part 3   Part 4

First of all, keep in mind that flood insurance is provided by the National Flood Insurance Program (NFIP). No matter which insurance company writes the policy, the actual insurer is NFIP. (In other words, you and I, the American taxpayer.) As long as its coverage is the same, and is calculated correctly, the cost of a flood insurance policy will be identical no matter which company writes it. If one company claims they can “save you money” on your flood insurance, it’s because they are reducing the coverage. Be careful to check your new or existing policy for contents coverage! Remember that lenders only require that the HOUSE be insured, not your personal possessions within. Sometimes buyers were sold flood policies which only covered the house, only to realize after a disaster that their contents were uninsured. As you saw in part 1 of our flood insurance series, we lost our house and everything inside it. Contents coverage was a lifesaver.

When flood insurance is required, its cost is determined first by the flood zone in which the property is located. If it’s in a lower risk zone such as B, X500, C, or X, the rates are determined by a straightforward chart, based on coverage amounts. That chart is located here.

When located in a Special Flood Hazard Area (SFHA) such as zone A or AE, the cost is determined not only by the amount of coverage, but by the elevation of your house compared to the base flood elevation (BFE) for the immediate surroundings. In general, the higher your property is above the BFE, the lower your insurance rate. (For an explanation of the flood zone codes, BFE, etc, see part 2 of our series.)

To see how this works: Suppose the elevation of your house, which is calculated from the lowest floor surface of the living area, is 50.8’ above sea level, and the BFE is 50’. That makes your house 0.8’ above BFE. Rounded to the nearest foot, it would be considered a +1’ for insurance purposes. If the house were instead at 50.1’ above sea level, it would round to 50.0’, which a +0’, or even with BFE.

Anything lower than BFE causes the rates to skyrocket. This is understandable, because a house that lies below BFE is lower than the predicted level of the floodwaters should a flood occur. It is true that some houses which lie below BFE have never flooded, and may never flood. However, insurance is based upon risk probabilities, and that is what we must deal with. A couple of our clients had homes which fell below BFE due to map changes (more on that next time) and their flood insurance premiums rose to $3,000 – $4,000 per year! This is a huge financial burden for the homeowner, and an enormous obstacle for potential buyers.

Besides the cost and higher risk for a house which lies below base flood elevation, such homes are not eligible for financing with a USDA Rural Development (RD) loan. RD will finance houses located in a SFHA (“flood zone”) but NOT if they lie below grade.

The elevation of a house is determined by a surveyor. They measure the height of the lowest floor surface of the living area and compare it to the BFE for that location. The document generated is called a Flood Elevation Certificate. Be very wary of multi-level houses, homes with enclosed carports/garages, sunken living rooms, etc. Although they often measure from the top of the slab outside, surveyors are supposed to find and use the lowest spot to calculate the elevation. If they do so, such lower areas could make a HUGE difference in the flood insurance premium.

Next time we’ll talk about how maps can change, how to deal with those changes, and the Biggert-Waters Act, which is causing drastic effects on flood coverage for many homeowners.

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