October 10, 2019 Articles

Flood Coverage and High Hazard Zones: Issues Policyholders Should Be Aware Of

Inaccurate and changing FEMA flood maps, confusing policy wording and varied methods for flood zone determination render the expectations of both policyholders and insurers uncertain.

By Lawrence J. Bracken II, Michael S. Levine, and Alexander D. Russo[1]

Flood insurance usually is the last thing on the minds of most property owners, especially those with property in locations that rarely or never experience significant flooding. Rising sea levels, expanding development, and the effects of climate change, however, already are creating the potential for flooding in areas previously considered impervious to the peril. For the same reason, many of the Federal Emergency Management Agency’s (FEMA’s) flood maps are outdated and fail to show current high-risk flood zones. Consequently, property owners may want to purchase flood insurance, even if they haven’t experienced a prior flood loss, to address the expanded risks. When doing so, policyholders should be mindful of the pitfalls that frequently befall the unwary holder of flood insurance. This article discusses several of the points of contention that frequently arise between a policyholder and its insurer after a flood loss.

Coverage for flood damage is usually excluded under standard homeowners’ and commercial property policies. Policyholders whose property has a flood risk can obtain coverage under a separate policy from insurers participating in the National Flood Insurance Program. These policies provide primary coverage up to $500,000 for commercial property owners. Policyholders must turn to excess flood coverage for higher limits. To limit exposure, excess flood policies often have sub-limits, which operate to reduce the amount a policyholder can recover in the event of a loss in a higher-risk flood zone. The type and amount of sub-limit is often tied to the property’s FEMA flood zone location. For example, a policy may provide $200 million worth of flood coverage, but that coverage may be sub-limited to $50 million for property located in a Special Flood Hazard Area, or “High Hazard” flood zone, as determined by FEMA. The assignment of a property to an SFHA could substantially reduce a policyholder’s possible insurance recovery in the event of a flood loss.

As discussed below, the confusing language of these policies and FEMA’s changing, and often outdated, flood maps have spawned multiple insurance litigation disputes containing issues that policyholders purchasing flood insurance need to be aware of.

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