Flood Insurance … To Buy or Not to Buy, that is the Question
by Bryce Linden, Attorney at Cook & James
This blog is a forum to curate expert commentary, opinion and thought leadership resources. In the past we’ve talked about and profiled topics including real estate cyber insurance issues, RESPA compliance best practices, communication issues that can impact a closing, and smart marketing strategies and pitfalls when people who are not necessarily married purchase property together. In this blog post, one of our newest attorneys here at Cook & James, Bryce Linden, begins a mini-series examining topics in environmental real estate law transactions and today starts by covering flood insurance.
As a closing attorney, I have been given the privilege of conducting many closings during my tenure and, more often than not, when we get to that important document that discusses flood insurance, I get some pretty quizzical looks.
In most circumstances, lenders do not require flood insurance at closing however, it is required if your home is in a flood zone or is eventually determined to be in a flood zone during the life of the mortgage. Yes, as time goes by, a property can be classified as a flood zone in which case the lender typically sends a letter commanding that flood insurance now be purchased otherwise risking default on the loan.
So, this can be slightly confusing and it’s important to have someone on your side interpreting what’s required versus what’s suggested best practice versus what’s in the best interest of the property owner.
One of the last - and often overlooked - checklist items during the buying process is whether a potential new home is located in a flood zone. Many homeowners believe if they are not in a flood zone, why bother spending money on something that will likely not happen in the future. This is a myth.
According to the Federal Emergency Management Agency (FEMA), 20% of all claims filed are by policy holders outside of high-risk flood areas. Sadly, many homeowners are left stranded after a flood when they find out that their homeowner’s insurance policy does not cover flood damage. Any natural disaster, including flooding, can cause significant, long-term structural and financial damage because just one inch of flood damage be responsible for nearly $25,000 in financial damage.
No one ever expects an environmental disaster to occur much less cause significant damage until it’s too late and the damage is already done. The good news is that affordable flood insurance coverage exists and any homeowner can purchase it. Obviously, policies vary and price can be based on a number of different factors including a home’s size, design and construction, age, contents, the type of coverage being purchased, the policy deductible and, of course, the structure’s location and risk within the flood zone.
Another reason that homeowners take a pass on flood insurance is the common misconception that, if a flood does occur, the government will step in to assist. Again, a myth with only partial truth.
A homeowner can only secure flood insurance from the government if the President makes a disaster declaration. The majority of floods do not require such a declaration because they usually only happen during a high-profile act of God event, like a hurricane. And even if the federal government assists, in some cases it requires that money provided to the homeowner be paid back over time with interest.
So, the most important question to ask during the home buying process becomes whether or not a potential home will be in a flood zone. A real estate agent should be able to provide this information. Another good resource is the FEMA Flood Map Service Center, an easy way to determine if a home is located in a flood zone which only requires a physical address.
Once the flood zone status of a home or potential home is determined, homeowners are one step closer to deciding if the flood insurance expenditure makes sense. We always recommend people speak with the appropriate professionals because every situation is different, but it can be helpful to know that standard flood insurance coverage can include such items as:
1. Electrical and plumbing systems,
2. Furnaces and water heaters,
3. Refrigerators/cooking stoves/built in appliances,
4. Permanently installed carpeting,
5. Permanently installed cabinets/paneling/bookcases,
6. Window blinds,
7. Foundational walls/anchorage systems/staircases,
8. Detached garages
9. Fuel tanks/well water tanks and pumps, solar energy equipment.[1]
The goal with flood insurance is to be proactive rather than reactive. Homeowners will only be protected if they ask the right questions and perform their due diligence to determine if there is potential for a home to flood during a natural disaster.
Here’s to wishing Mother Nature provides many sunny days and clear skies ahead but, as Mom always said, it’s always better to be safe than sorry – and that goes for flood insurance too!
Bryce Linden holds a law degree from Georgia’s Mercer University and an LL.M in environmental law from George Washington University in Washington, DC. While in our nation’s capital, he clerked for the EPA, specializing in hazardous waste, chemical clean-up and other environmental hazards as they pertain to real estate transactions. Linden brings his eco-expertise to Cook & James and will work on residential resale transactions as well as with home builders. This is the first of a series planned to cover various real estate law and environmental issues.