Forty-seven people died as a direct result of "The Great Flood of 1993," in the same areas currently experiencing extreme flooding. Up to that point (prior to Katrina), this was considered the most costly and devastating flood in modern US history. Twenty million acres of land in nine states were inundated; 54,000 people were evacuated; and approximately 50,000 homes were destroyed or damaged. And despite the estimated $15 billion to $20 billion in damages, NFIP-insured losses totaled only $272,827,070 divided over 10,472 claims (about 20 percent of the damaged houses).

Roughly, only one-and-one-half percent of the total damage was insured by NFIP. While this is a very small percentage, ultimate NFIP-insured losses may have actually been higher than they were supposed to be. At the time, NFIP flood policies had a five-day waiting period. Allegedly, residents in downstream communities saw the devastation that was coming and hurried out to buy flood insurance before the flood waters reached them. Because of such reports, Section 579 of the National Flood Insurance Reform Act of 1994 increased the NFIP flood policy waiting period from five to 30 days.

Terms and Conditions particular to NFIP policies have evolved, changed and been added since the plans formation in 1968. Many of these changes have been the result of inflation (such as increasing limits), some as a result of actual problems and still others the product of anecdotal evidence (like the waiting period change). Some of these provisions will be highlighted in the following paragraphs. These are unique requirements and limitations that agents must understand and explain to their flood clients and potential clients.

Waiting Period

All new NFIP flood policies are subject to a 30-day waiting period (with some exceptions). This mandated waiting period applies to both direct policies and policies written through a Write Your Own (WYO) carrier. Tolling of the 30-day waiting period begins once the application and the estimated premium are received as follows:
• From the date of the application if the application and premium payment are received within 10 days of the date of the application; or if the premium and application are mailed via US Postal Service certified mail within four days of the application.
• From the date of receipt at the NFIP if the application and payment are not received within 10 days of the date of the application; or if the premium and signed application are not mailed via certified mail within four days of the date on the application.
**NOTE: The waiting period countdown will not begin until the estimated premium is received.

Losses in progress on the effective date are excluded from coverage. A delay in mailing the application and premium could be the difference between a flood loss being covered and being excluded.

Exceptions to the 30-day waiting period for individual or entity coverage are:
• Renewals -No waiting period provided renewal premiums paid;
• Loan closings - effective at the time closing papers are signed (no waiting period);
• Revision or updates to a FIRM - 1-day waiting period; and
• Endorsements to reduce coverage - 1-day.

Thirty-day elimination periods also apply to endorsements requesting an increase in coverage or a decrease in the deductible.

Direct Loss Only

Standard flood insurance policies cover only direct losses suffered by the insured. There is no provision to pay indirect losses.

A direct loss is the actual damage to the real and/or personal property resulting from a covered cause of loss. Indirect loss is the increase in expenses or loss of income created by the direct loss.

Excluded are any additional livings expenses incurred while the dwelling is being repaired as well as any loss of income a business suffers due to the inability to occupy and/or operate the business. Any outlay not directly related to repair or replacement of the damaged property is an out-of-pocket indirect expense for the homeowner. Unrealized income resulting from flood damage is a businesses' out-of-pocket, indirect cost of a flood.

Deductibles

Deductibles in NFIP policies apply separately to each class of property insured. The insured pays two deductibles following a loss: one for the real property and a second for personal property.

Separate deductibles based on type of property insured is contrary to the homeowners' and the commercial property policy's use of a deductible. Deductibles in these policies apply to the loss, not the class of property. Thus, the insured is only responsible for one deductible regardless of the class of property damaged or destroyed rather than two as required by the NFIP policy.

Standard NFIP deductibles and rate credits for the various deductible options can be found on FEMA's website. Factors and credits are based on:
• The flood zone;
• A structure's status as Pre-FIRM or Post-FIRM;
• The classification of the structure (residential, other residential, non-residential; and
• The type of property insured: building or contents.

Increased Cost of Compliance

Increased Cost of Compliance (coverage part D) is mandatory on all three standard flood insurance policy forms in regular programcommunities. ICC coverage is not available for structures in emergency program communities or for individual units in a residential condominium association.

Communities that have adopted flood plain management requirements within their ordinance or law provisions may require certain structures to be altered or removed following flood damage. Such consequential expense is only available through Coverage Part D. Increased Cost of Compliance coverage will pay the additional costs to:
• Elevate the structure as required by local code;
• "Flood proof" the structure;
• Relocate the structure; or
• Demolish the structure.

The $30,000 ICC limit is paid in addition to the amount of direct flood damage. However, FEMA's payment will never exceed the maximum available coverage, even when ICC coverage is added. For example, the insured purchases the maximum amount of dwelling coverage available in the dwelling form, $250,000; if there is a $245,000 direct loss, the maximum coverage available under the ICC extension is $5,000, regardless of the total cost to comply with an ordinance or law. This is why the premiums for ICC coverage decrease after the dwelling limit surpasses $230,000 ($480,000 for non-residential structures).

To be eligible for Increased Cost of Compliance coverage, the structure must meet one of two requirements (in addition to those previously discussed):
• The structure must be a "repetitive loss structure" for which NFIP has paid a previous qualifying claim in addition to the current damage; or
• The structure must sustain "substantial" flood damage ("substantial" was defined in a previous article).

Reduction or Reformation of Coverage

Flood policies can be "re-formed" and the limits reduced if the premium paid is not sufficient to cover the amount of coverage requested. Such issues can result for various reasons, including the difference between the base flood elevation (BFE) and the reference point is miscalculated, or there have been structural changes moving the reference point to a lower level (such as by enclosing the area under an elevated floor in a Flood Zone "A").

If the deficiency is discovered by FEMA prior to the loss, the insured is given 30 days to pay the difference between the one-year premium paid and the actual policy-year premium based on correct rating information. However, if the discrepancy is found at the time of the loss, the insured is allowed
60 days to cover the difference in paid and actual premium for the last two policy years. Seems generous expect for the fact that the insured has no place to live, has to come up with additional premium while also paying for a hotel room and negotiate with the insurance carriers (wind and water damage).

Potentially severe penalties apply if the insured does not or cannot pay the additional premium. If the insured does not make up the difference, the limits on the policy are reduced to match the premium paid. Now the insured has less coverage than they thought.

Coverage limit difference resulting from reformation is easily exampled using a 1-story dwelling in a Flood Zone "A." For sake of the example, assume a $250,000 limit, standard deductibles and ignore all policy fees. If the premium is calculated at two feet above Base Flood Elevation, the basic premium for the structure is $355. If, however, the reference point is actually only one foot above base flood elevation, the base premium would be $530.

Although there is only a $175 difference in base premium, there is a huge difference in the amount of coverage that can be purchased. At one foot above BFE, the $355 premium can only purchase $45,000 of flood coverage for the subject dwelling - a $205,000 reduction in coverage due to the miscalculation. If this were discovered at the time of the loss, the insured would have 60 days to pay an additional $350. This could easily be done as that is relatively inexpensive, but if the insured cannot come up with it, they are losing a lot of coverage.

The above produces a minor difference in premium, but what is the difference in premium when insureds enclose the area beneath an elevated structure changing the reference level to some point below BFE? There are several problems created in this case (violation of flood plain management laws, making the structure ineligible for coverage, etc.), but for sake of the discussion, reformation of the coverage is the issue in this section.

This is very common among insureds that buy vacation homes on the coast. They buy one and after a couple of years decide to enclose and make use of the "wasted" space below the house. Doing so drastically changes the reference point; now the example structure above may be five feet below BFE. The previously paid premium may only purchase $5,000 worth of coverage (just a guess) and the insured would have to pay an additional $2,000 or $3,000 premium to garner the coverage they thought they had (if they can get it at all).

Lesson learned: the agent needs an updated current photo or to conduct an inspection at least bi-annually to confirm there have been no such changes. Such action can lessen the chances of an errors and omissions loss from the "You never told me…" charges the client will lob.

Conclusion

The final article in this series will review current Federal regulations affecting coverage along coastal areas and will present a quick review of the changes contained in the current legislation before the senate.