Whose Responsibility Is It’ Educating Agents and Insureds about Flood Insurance

The Federal Emergency Management Agency (FEMA) estimates that almost 11,000 households in the U.S. are at risk for flooding, which accounts for 90 percent of all disasters nationwide.

Yet, the vast majority of American property owners, even an astonishing percentage of those whose properties are designated as being located in high-risk flood zones, do not purchase flood insurance.

“There’s a mentality that if you need it, someone will tell you, and if they don’t tell you you have to have it, ergo, you don’t need it,” said Elsa Houtz, media relations manager for Bankers Insurance Group in St. Petersberg, Fla., adding that while most people would never consider not having their homes insured against a fire, a home in a high-risk flood zone is many times more likely to be flooded than damaged by fire.

“When you look at the large percentage of properties that are in special flood hazard zones that do not have insurance, there’s a couple of factors that come into play,” said John Gelrud, marketing representative for the Western region American Bankers and American Reliable Insurance Company. “First, the requirement of having flood insurance is really a function of a lender, so the onus of all the rules and regulations really [lies with] the lender. If there’s no loan, there’s no requirement to purchase it.” It then becomes a voluntary purchase on the part of the property owner.

“Now it becomes an issue with the agent,” Gelrud said. “Does the agent know enough about it? Many times no. It’s a very complicated program…Sometimes, agents not doing a lot of [flood policies] are uncomfortable with the subject, and sometimes they don’t bring it up, although that is changing immensely.”

Steve Schwartz, CEO of King Insurance in San Juan Capistrano, Calif., pointed out that while homeowners really don’t have the option of buying flood insurance except through the national flood program, some agents perceive it as very cumbersome to use and are, therefore, reluctant to get involved with it.

“Typically what happens is that a homeowner applying for homeowners insurance is really not told that it doesn’t include flood insurance unless he asks about it,” Schwartz said. “Federal lenders do require it, but the question is, do any of them really follow up on it? The answer is no, even though there are pretty stiff penalties imposed…A lot of the insureds aren’t really aware that they don’t have flood coverage.”

The primary source of flood insurance for U.S. homeowners, renters, condo owners and small business owners is the National Flood Insurance Program (NFIP). Administered by the Federal Insurance Administration (FIA), part of FEMA, the NFIP was established in 1968 and expanded by the National Flood Insurance Reform Act of 1994.

Operating within the NFIP is the Write-Your-Own (WYO) Program. Started in 1983, the WYO Program allows participating property and casualty insurers to write and service the Standard Flood Insurance Policy in their own names. As of October 1996, FEMA was involved with about 90 WYO companies.

According to Mark Stevens, a public affairs officer for FEMA, the basic requirement for a community to be eligible to participate in the NFIP is that the local officials must adopt and enforce various flood plane management ordinances designed to reduce future flood losses by regulating new construction. Individuals who own property in participating communities cannot buy a flood policy directly from the NFIP, but they can purchase flood coverage from any licensed insurance agent, whether independent or affiliated with a particular company.

Lisa Murman, vice president of Bankers Insurance Group (a WYO company), said her company works through the independent agency system.

“Our agents would be writing with Bankers and then offering the coverages to the customer direct,” Murman said. “Generally [customers] have gone in to an agent…They’ve just bought a piece of property and their financial institution has told them that to close on the loan, they have to have flood insurance…If they’re in a high-hazard area [Special Flood Hazard Area], or they are borrowing federally insured money, they are being told that they have to have the flood insurance.”

“The financial considerations are that if an agent is dealing directly with the NFIP, they pay a standard 15 percent commission,” Gelrud said. On the other hand, WYO companies are paid a flat fee, with each company paid the same amount for every dollar of premium they bring in.

“From that flat fee we decide what we want to do with it,” Gelrud continued. “Our basic philosophy is to pay a very competitive commission and provide a lot of consumer benefit for the agent to help to sell the product and understand it.”

Because FEMA administers the program and sets rates, the premium for a particular property will be the same regardless of who writes or sells the policy. That premium will be based on the amount of coverage, the deductible the property owner elects to carry, and most importantly, the actual degree of flood risk to which the property is exposed.

“The reason Congress established [the NFIP] was because there were a few insurance companies that wrote flood insurance policies, but they set the premiums so high in order to protect themselves against the risk of a catastrophic flood very few people could afford it,” FEMA’s Stevens said. “In the case of NFIP, the idea is to set the rates just barely high enough to cover the anticipated claims from an average historical loss year. We don’t have to build up a catastrophic reserve.”

Furthermore, a borrowing authority to the U.S. Treasury is built into the legislation. “If there are a series of major flood disasters in rapid succession, we simply borrow from the Treasury to make sure that if there’s another flood around the corner, there’ll be plenty of money in the kitty to cover those losses,” Stevens said. “As the claims subside, the borrowed money is paid back with interest to the treasury from the premium income.”

Flooding that is not covered under the program includes basement seepage from wet ground (e.g. snow melt) and sewer backup. In addition, wind-driven rain (entering through windows, doors, or a hole in the wall or roof caused by wind damage) is not considered flood damage.

“However, if there’s a general condition of flooding that inundates ground that’s normally dry that affects several properties, the cause could be neighborhood storm drains that are inadequate for the volume of water that might cause sewer backups in a bunch of homes-that would qualify as a flood loss,” Stevens said.

While most property owners are eligible to buy flood insurance through the NFIP, there are a couple of exceptions to the rule. As previously mentioned, some properties may be located in communities which do not participate in the program. Also, a property owner whose home is built in a designated Coastal Barrier Resources System (CBRA) area may not be eligible for federally insured flood insurance. However, flood insurance is available to nearly all property owners in the U.S.

Outside of the NFIP, a few other options for obtaining flood insurance do exist. For example, Lloyd’s of London writes flood insurance policies using NFIP rates. In addition, for large commercial operations which require higher levels of coverage than the ceilings set for average property owners, there are some private insurance companies that write what are called All Hazard Industrial Policies.

According to Schwartz (of King Insurance), many mobile home policies also include flood. “That’s because the aggregates are so much lower,” he said. “You’re talking about a $40-50,000 mobile home, not a $400-500,000 home. The other thing is mobile home parks are typically not built in flood zones.”

Schwartz said the real question is whether there should be a program developed by insurance companies to include flood. “The answer is probably no because the catastrophic reinsurance market is very cost-prohibitive, and we have a very soft homeowner market,” he said.

Consumer misconceptions

A major contributing factor to the low percentage of U.S. property owners which buy flood insurance is that consumers have a great many misconceptions about how they will be covered in the event of a flood. These include an “it can’t happen to me” attitude, as well as a simple lack of awareness of what is covered in a typical homeowners policy.

Murman emphasized that the danger of flooding exists in all areas-not just in high-risk areas. “It’s a real common misconception because 25 percent of flood damage actually occurs outside of high-hazard zones,” Murman said. “Although a piece of property may be in a low-hazard area, the agent can still offer that property owner a proposal for insurance. Of course, it’s at a much reduced price because the risk of flooding is less.”

Furthermore, some property owners mistakenly believe that if their properties are damaged by flood, the U.S. government will come to the rescue in the form of federal disaster assistance. The truth is that less than 10 percent of all disasters are of a magnitude great enough to be presidentially declared, and for the other 90 percent there is no federal aid.

Houtz said that with respect to the 10 percent that are presidentially declared disasters, federal assistance usually comes in two forms. One is called an individual or family grant. “They average $2,500,” Houtz explained. “Can you rebuild your house for that? Or you can get a loan, but you have to pay it back with interest. The average flood insurance premium is $350 a year. Compare that to paying back a $50,000 federal disaster loan.”

Stevens noted that while federal disaster assistance is funded by tax dollars, NFIP flood insurance claims are funded by premium income. “The more people that are covered by flood insurance, the fewer have to be bailed out by the taxpayers,” he said. “And the protection is more generous and comprehensive.”

Stevens also noted that if a property owner receives assistance in a presidentially declared disaster, that owner is now told in writing if the property is located in a special flood hazard area. If the property owner does not purchase flood insurance, in the event that the property is flooded out again, the owner will not be eligible for the same type of federal disaster assistance a second time.

Educating agents

The NFIP has been waging a public information campaign nationwide for the last several years. This includes ads in magazines and on television, the development of a highly informative Web site (www.fema.gov/nfip) and the establishment of an information hotline for questions about flood insurance (1-800-427-4661). In addition, FEMA conducts hundreds of workshops for agents throughout the country each year.

It is not an uncommon perception of those familiar with this market that agents often try to deal with the issue of flood insurance as little as possible. Reasons for this include complaints that it can be difficult to keep track of all the different rules of the NFIP and that the federal flood program also has some non-industry standards (e.g. no binders and waiting periods that go into 30 days).

However, there are those who believe that agents have a responsibility to fully inform their customers about flood risks. Moreover, opportunities for agents to become educated in this particular subject matter are readily available.

“Agents have their checklists,” Gelrud said. “All they have to do is make it a part of their own personal professional standards-Did you ask about flood insurance? It’s pretty a logical thing to do, especially if you want to cover yourself from an E&O perspective.”

While there are some locations in the country where agents are extraordinarily knowledgeable on the subject of flood insurance (because all of their homeowners live in areas requiring flood), in places where it is not so common, agents may be far less informed about flood insurance options.

For that reason, many companies offer seminars or agents can enroll in continuing education credit classes, such as those offered by FEMA and others.

A great deal of the battle seems to lie in convincing leery customers that buying flood insurance is worth the expense. “They see a chunk of their paycheck being sent off for what they see as nothing but a promise,” Gelrud said. “They hear terms like ‘hundred-year flood plane’ and say, ‘It flooded four years ago. I’ve got 96 years to worry about this,’ and that’s not true. It could flood every year for 100 years and still be a 100-year flood plane.”

In response to the question of whether or not there is adequate incentive for agents to push flood coverage, Gelrud concluded with this: “There’s a great deal of incentive, and [that is] if you’re a professional insurance agent, it’s your responsibility to at least ask the potential risk your customer has based on what it is you’re insuring…Give the customers options, and let them make the decision.”

Topics USA Agencies Flood Property Homeowners