Why Flood Insurance Is Not Automatically Included In Your Homeowners Insurance

It is not unusual to find that insurance policies come with varying exclusions. One of the most common exclusions is flooding – it’s simply not covered by homeowners insurance, and very few homeowners bother with it. 

According to a 2016 survey by the Insurance Information Institute, only 12% of homeowners have flood insurance. In the previous year, that figure was 15%. Why homeowners do not seek cover for such a potentially devastating event could be due to many reasons, but the most probable might be an assumption by most people that their homeowners insurance covers them in the event of flooding.

Regardless of the reason, the fact remains that your homeowners insurance doesn’t cover flooding, and in this article, we take a look at why this is so. But before we proceed, it is important to know that there is a difference between water damage and flood damage. 

Water damage from a broken or leaky pipe in your home would be covered; but what is properly referred to as a ‘flood’ in insurance terms would not be. Flooding, in insurance terms, refers to a situation in which a body of water outside your home overflows to a point where it enters your home. Usually such events are due to a natural disaster and more than one home is affected. It’s this kind of flooding that’s not covered.

1.           Costs of flood losses exceed premiums collected

The first reason is a simple matter of economic sense – it doesn’t make any for insurance companies. The cost of damage associated with floods is simply astronomical. Interestingly enough, there was a time – before 1950 – when flooding was covered by the homeowners insurance. However, over time, losses incurred as a result of flooding increasingly became too much of a burden. As a result, many insurance companies started excluding flooding from their homeowners insurance packages. 

Eventually, in the early 1960s, all private insurance companies stopped offering flooding insurance because it wasn’t profitable. This created a huge gap and forced homeowners to bear their losses, many of which was simply too onerous owing to the high costs of the losses. This forced the government to step in. At first, the government provided public disaster aid to assist homeowners before the NFIP was established in 1968 to provide flood insurance.

2.           Relatively low numbers of properties involved

The way insurance works, so that it is profitable for insurance companies, is to have a lot of people subscribing to a policy. Larger numbers of people translates into a larger pool of money from premiums to offset losses from the few people who do need to claim on the insurance policy. 

When the reverse is the case, then the pool of money is smaller. And so insurance companies would literally be shooting themselves in the foot if they included flooding as part of homeowners insurance without extra premiums to make the pool of money larger. But of course, the ability to charge extra premiums is based on the premise that more people would be willing to pay it for flood insurance, a notion already negated by the 12% statistics cited earlier. 

However, private insurance companies offer additional insurance known as ‘excess coverage’ on top of the flood cover the government offers. The government only offers up to $350,000 in coverage - $250,000 for house structure and up to $100,000 for the contents and personal possessions in the house.

Ultimately, insurance companies need to make profits; providing flood cover diminishes that profitability and that is the main reason why flooding is usually not included in homeowners insurance covers.