Why is flood insurance separate from homeowner/renters insurance?

In My Humble Opinion
1

It has occurred to me that ‘insurance’ that doesn’t cover a major, known uncontrollable risk is not a good policy to have. Selling insurance that excludes floods is comparable to being permitted to sell health insurance that excludes heart conditions. Or, in other words, a piece of paper of dubious worth in exchange for the insurance premiums.

Why do state governments allow the insurance agencies to get away with this? If the risk of flooding was explicitly itemized in an insurance premium, home buyers would avoid flood prone areas, as they should.

2

Flood insurance is available (from the Federal government, if I recall) and people in some places actually are required to purchase it.

The probably is, as we have seen both now and in past crises, floods are really frickin’ damaging. Private insurance deemed it a bad risk and upped and upped premiums to where people couldn’t afford it, or just stopped offering it entirely.

Keep in mind, too, that many of the areas in Houston now being flooded have never experienced flooding before. Or did you think they deliberately set up shelters in areas know to flood? This water in this disaster apparently exceeded all predictions,

3

So it’s your contention that one gigantic insurance policy should cover everything?

Do you not see any potential issues with life, health, car, home, etc., all being on one single policy?

4

The OP never said for all of the possible insurance plans to be combined. It is only for flood insurance to be a part of the normal home/renter policy.

5

It seems only logical that ‘homeowner’s insurance’ should cover the financial risk to your home. Any uncovered risks are defeating the point of insurance. Of course, deliberate actions by the homeowner, actions by the government, and acts of war have to be excluded, but this is reasonable and commonly understood for all insurance policies.

6

The real reason is to discourage people from building homes in areas prone to flooding. That is a sound idea. When the idea goes bad is when an area not expected to get historical level floods gets hit.

It really sucks for those victims but you can’t insure everyone against everything unless they want to pay for it. Life is risky and everyone dies at the end. I feel terrible that so many people are going to lose everything they have worked hard to achieve but this isn’t WWII we are talking about.

They will make it somehow and hopefully learn to buy flood insurance and lots of other protection in the future. I have earthquake insurance on my home in New England. Do you know how often serious earthquakes hit New England? Almost never but it could happen so I protect against it and just about any other possibility. That is what responsible adults do.

7

Flood insurance is like passenger rail; it’s only available from the federal government because it’s too expensive for the private market to support. Back in the day, the cost of private flood insurance was threatening to overwhelm a lot of homeowners, especially in lower income brackets. The government began offering a product that was significantly lower-cost, because it’s not actuarially sound. No one else can compete with that, so the private market, well, dried up.

As a matter of process, a family often buys flood insurance through the same company that provides general homeowner’s insurance, because the government contracts with private insurance companies to sell its flood policies and administer claims.

8

It is a contract. All you have to do is read it when you buy it. Anyone is perfectly free to buy flood insurance as part of their homeowners policy or as an adjunct policy. It just costs real money and that is the reason many people don’t do it. Insurance company actuaries actually know what they are doing because they are math whizzes. The general public often does not because they want to cheap out on something that could happen but probably won’t.

The problem comes when they lose that bet and expect someone else to pay for their own shortsightedness. Life doesn’t work that way. Bad things happen and you can’t expect someone else to pay for your loss just because you wanted to eat at Applebees a couple of times a year instead of insuring your own home for an unlikely but very real risk of losing everything.

Insurance companies provide a valuable service but they are also just like casinos. They take your money with the expectation of a (generally small) profit on individual policies but they are also not a charity and it is your own fault if you end up on the losing side of the contract.

9

It is kind of weird that they take the time to value out your house so that it may be replaced completely if it burns to the ground.

But if a flood comes and your house needs to be replaced well that’s too bad.

10

It is generally accepted in most areas of the world that :

a. The government shall enforce contracts

b. The government must regulate implied contracts, as naive individuals may otherwise be taken advantage of

c. The government should discourage products that cause long term harm or unnecessary costs to their buyers. This is why the government sets minimum standards for vehicle and appliance efficiency. Otherwise, naive buyers may choose to save a little money up front but pay a lot of money later. And minimum standards for building materials. And fire resistance. And countless things, actually.

You may disagree with all this and want a form of anarchy-capitalism, but this is not generally how things are done in the Western world. This hole in homeowner’s insurance is a notable exception to this.

11

[ my bold ]

Universal healthcare funded out of general taxation is a more fundamental and uncontroversial human right falling under the heading of the way things are generally done in the Western world. Yet the majority of Americans oppose that, so I don’t think we can take public support for any form of mandatory insurance as a given.

With flood insurance, I think it’s a misrepresentation to claim that the real problem here is insurance companies “getting away with” something. It’s not clear to me how you think the insurance companies are at fault, unless they are hiding exclusions from flood coverage in the small print. It also seems unimportant whether flood risk is insured separately or integrated with general homeowner’s insurance.

The key element of what you appear to be advocating is that flood insurance should be mandatory for all homeowners. You’re not really seeking to impose something upon insurance companies, so much as you’re seeking to impose it on homeowners, who will be obliged to pay higher premiums - in some cases much higher.

I think there’s a decent social argument to be made for universal mandatory flood insurance, because otherwise taxpayers will periodically have to bail out (and bale out) uninsured people. But it’s deceptive to characterize the issue as big bad insurance companies being allowed to “get away with” something. The fundamental question (not philosophically dissimilar to healthcare) is whether this society believes that flood insurance should be mandatory for all homeowners, or whether we should be free make our own (possibly dumb) decisions to remain uninsured if we wish; while inevitably relying upon the federal government as a backstop to save us from total ruin in extremis.

12

It’s pretty clear that homeowners insurance doesn’t cover flood damage. It also doesn’t cover earthquake, and in some cases, war, terrorism, etc. This shouldn’t be a surprise to any homeowner as it’s explicit in home policies.

Any ho.eowner may purchase flood coverage, so the idea that it would be line itemed out is already done. As mentioned, most private carriers can sell a flood policy but they are simply servicing the polocy, the actual risk is carried by the feds.

There are lots of uncovered risks. The biggest would probably be the limits on each policy. Insurance isn’t like a casino in any real sense.

13

No, it’s almost entirely unavailable on the private market. For nearly everyone, federal flood insurance is the only option (and it’s sold below cost).

Some people have to buy it in order to get a mortgage. Others don’t have to, but probably should; they’re the ones who are gambling.

14

Federal insurance also only covers about $250,000 and sucks for contents, etc. It’s mostly to protect mortgage holders. I had to buy private flood insurance to actual protection for my residence and contents. About $4,500 per year :frowning:

15

I think the core problem is that history has placed a lot of cities and settlement in potential flood paths and now it’s politically impossible to take measures that minimize future economic impact of floods.

The current status in the US is that private insurance companies have almost entirely left the flood insurance market because people with a relatively low risk of flooding opted out altogether to the extent that the insurance in at risk areas became either impossibly expensive or too cheap to cover the pay-outs. The government stepped in, but price the insurance lower than the expenses and refrains from mandating it for large enough areas, because raising the price and increasing the number of homes with mandatory insurance is politically impossible. It would, for instance, mean deciding here and now that New Orleans needs to be abandoned.

Mandating everyone to have flood insurance would have a similar effect. Either the insurance companies flatten the curve somewhat and demand enough from people living on hill tops in the desert to cover future Katrinas and Harveys, which might lead to more people in such areas skipping home owners insurance, or you make it impossible to afford home owner’s insurance for thousands of current homes.

16

You make an interesting point here about the premium. It is expensive yet it is still under priced when considering the loss ratio faced by the NFIP because they pay out more than they take in. The risk of loss is simply too high to justify this premium and remain solvent without borrowing and increasing debt. In order to continue the program, it is subsidized by all taxpayers, most having no flood policy and in many cases, no risk of damage from a flood.

Flood insurance is a self-defeating concept because it encourages rebuilding and new construction at flood prone areas while charging a premium that does not support a program that can be self-sustaining. At the beginning of this year, the NFIP was about $25 billion in debt.

One step to reduce future losses would have the NFIP stop issuing any policies on new construction in flood prone areas and re-evaluate premiums on properties sustaining reoccurring losses.

17

Historically, the private insurance market didn’t insure floods because all the houses flood at the same time, and the company wouldn’t be able to pay.

Insurance works by spreading the risk. Everyone pays premium, and those people who have bad luck get reimbursed. And for fire (originally the only insured loss on homes – it was called fire insurance, in fact) that model works well. Back when most insurance companies were small and regional, the risk of flood was simply impossible to insure by the private market. That’s why, when homeowners policies became more comprehensive, covering more than just fire, flood damage was excluded.

The federal government picked up the slack, because it was large enough to accept the risk of flood in one area. But it has underpriced the product for years (in part because it can tax all of us to make up the shortfall). But as a result, even though there are now large international insurance companies that probably could insure flood, no private company is interested. What private company wants to sell a coverage at a loss? And of course, the regional companies still couldn’t do it.

(Actually, there’s now this thing called reinsurance, and if flood coverage was, on average, profitable, regionals could spread the risk to larger companies and it might work.)

But even though the federal government sells flood insurance at a loss, many home owners don’t buy it. I’ve heard that only about 20% of the homeowners in Houston who were eligible to buy it (live in flood-prone areas) chose to do so. That’s because even though it’s subsidized, it’s very expensive.

Which goes back to the point above, that many homes are built in places where there shouldn’t be homes, because the risk of flooding is so high. Flood plains would be better used for things that require less expensive infrastructure. If you lose your rice crop every ten years, you can easily replant the following year, and if the land is fertile from regular flooding, that might make economic sense. But cheap flood insurance has encouraged rebuilding in-place.

I think North Carolina, which gets a lot of hurricanes, doesn’t allow rebuilding of homes lost to hurricane flooding, at least in the most storm-prone coastal areas… You can get your insurance money, but you have to find a new place to live.

The federal flood insurance program is expiring, and up for renewal. I’m sure this storm will affect the conversion in Congress.

18

I’ve never looked into flood insurance for my home because I live on top of a hill. I do have the optional/extra coverage for sewer backup damage, which costs $220 a year.

In case some don’t know, home insurance also does not typically cover loss due to earthquakes. Earthquake coverage is a separate rider. Obviously, it costs a lot more in areas prone to earthquakes, but it’s not inconsequential even here on the east coast. We added the coverage to our house and it costs $117 a year.

19

Because Insurance companies lobbied the people that make the rules to make it something separate. Flood damage is expensive and the companies didn’t want to be liable for it.

20

Keep in mind that much of the flooding that now occurs in areas that historically never flooded is caused by the building of new roads, housing, and shopping centers that alter the natural path of drainage and runoff. Also, drainage improvement projects upstream can cause a whole lot of water to move downstream a whole lot faster, up until it reaches the downstream end of the project and has no where to go. People who live in coastal and riparian areas all live downstream of someone, and what gets done upstream can have a devastating impact on those folks downstream.