Why is Flood Insurance Excluded From Most Homeowners Insurance Policies?

According to the National Associate of Insurance Commissioners, 33% are under the impression that flood damage is covered by homeowners insurance. However this is not the case! Since floods nearly every property is potentially at risk for flood damage and it can be extermely expensive it brings up the obvious question, why?

​How Insurance Works

Although its not always easy to understand, insurance is actually quite simple. A lot of people pay a little bit of money into a pool so that a few of those people who have bad luck can take out a lot of money. If you’re more likely to need to take money out or you could need more than other people then you have to pay more into the pool.

Insurance companies go to great lengths to determine how much each person has to pay into the pool so that everything is fair but in the case of flood damage things get tricky.

Homeowners Insurance Companies are Afraid of Adverse Selection

The trouble with flood damage is that some areas are far more prone to having it than other areas and the potential losses are enormous for the insurance company. Because of the difference in risk, it’s very difficult for insurance companies to charge rates to people who are likely to have a flood that are high enough to offset the increased risk.

If they don’t charge enough money to the people who are at a high risk of flood losses they’re likely to draw in way too many customers in those high-risk locations and the result will be too many clients at risk of incurring flood damage to be offset by the ones that are not.

This is called Adverse Selection, and it’s what the homeowners insurance companies are afraid of.

What You Can Do Instead

The best way to get your home covered for flood damage is to purchase separate flood insurance from the National Flood Insurance Program. Since it’s backed by the government and is a nationwide program there’s always enough money to pay out claims. To find out the rates for NFIP insurance in your location contact our agency today at (800) 747- 5311 or click here to get a free online quote.