Lacking Flood Insurance Can Lead to Property Risks and Unexpected Costs

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Lacking Flood Insurance Can Lead to Property Risks and Unexpected Costs


What’s the cost to a homeowner if they do not purchase a flood insurance policy? What about a current policyholder who allows a flood insurance policy to lapse? It can potentially be a tidy sum.

Recent United States. hurricane activity and severe flooding from coast to coast have amplified the cost of being uninsured, and just because it hasn’t previously flooded in an area doesn’t mean that it can’t happen. Additionally, for current policyholders, there is a financial burden for those who fail to consider the potential added expense of repurchasing a new policy after neglecting to renew their existing one.

Not High Risk? There Is Still Risk of Flooding

It’s estimated that fewer than 8% of homeowners are currently required to purchase and maintain flood insurance due to a federal, state, investor, or lender requirement. The flood insurance requirement applies to homes located in the high-risk Special Flood Hazard Area that are encumbered by a mortgage or are attached to certain grant or loan programs.  

While we expect to see this percentage increase slightly with the advent of the Florida Citizen’s requirement and a decision by The Federal Emergency Management Agency to suspend processing of smaller-scale map revisions in certain California counties, this still leaves several homeowners facing a voluntary decision on whether to purchase flood insurance.

According to the Federal Emergency Response Agency (The Federal Emergency Management Agency), 1 inch of water can result in over $25,000 of property damage, and the average federal disaster assistance payout for uninsured homeowners in less than $7,000. And these impacts are not just occurring in the high-risk Special Flood Hazard Area.

The Mortgage Industry Standards Maintenance Organization (MISMO) recently released a Flood Risk Disclosure Guide intended to inform homeowners about the broad extent of flood hazard, even for homes that are distant from the high-risk areas. According to The Federal Emergency Management Agency, more than 40% of filed flood insurance claims are for homes outside of a high-risk area.

These numbers make it clear that a low to moderate risk of flooding does not mean no risk. As climate change leads to more frequent and more severe floods, we need more homeowners to voluntarily purchase flood insurance for both their financial benefit and to foster more resilient communities and a collectively more resilient nation.

Retain Your Current NFIP Policy

As concerns about flooding rise, it is alarming to see almost 12,000 homeowners per month voluntarily drop their National Flood Insurance Program (NFIP) flood insurance protection, according to a 2023 Government Accountability Office (GAO) report.

Number of National Flood Insurance Program Policies, 2019-2022

Source: GAO, https://www.gao.gov/assets/gao-23-105977.pdf

While some homeowners are replacing an NFIP policy with a flood insurance policy from the private market, others are foregoing insurance entirely, leaving themselves uninsured and exposed. Some of those who find themselves without flood insurance are those who unintentionally lost their policy by missing a renewal deadline, either through a personal oversight or through a possible mistake by an agent or a mortgage servicer. Homeowners who want to reinstate a lapsed NFIP policy may face sticker shock and affordability concerns when dealing with the current NFIP’s programmatic restrictions.

Under current laws, premium increases for renewing an NFIP policy on a primary residence are limited to 18% per year, a cap known as the “glidepath.” However, this limitation in premium increases applies only when a policy is maintained. It expires if an NFIP policy lapses or is cancelled.

While not all current policyholders might experience a dramatic premium increase if removed from the glidepath, more than 30% might see premiums more than double in such circumstances, according to the 2023 GAO report.

Estimated premium changes under new NFIP rating system as of December 2022

Source: Government Accountability Office, https://www.gao.gov/assets/gao-23-105977.pdf

In fact, the Office of the Flood Insurance Advocate within The Federal Emergency Management Agency — a consumer-focused office charged by Congress to investigate flood insurance policyholder issues and concerns — found that the premium increase from a prior policy to a newly purchased policy averaged 380%.

Average percentage of premium increases following a lapse in a flood insurance policy

Source: Office of Flood Insurance Advocate, The Federal Emergency Management Agency, Periodic Report: July to September 2022

Homeowners, agents, and mortgage servicers should prioritize yearly renewals to ensure that an existing policy is paid, whether through escrow or personally, and that this renewal is completed within 30 days of the expiration date to avoid a lapse and possible financial consequences.

Flood insurance remains the most effective means to recover from a flooding event. Regardless of whether you’re living in a high-risk flood area or your mortgage lender requires you to maintain flood insurance, homeowners are encouraged to purchase a flood insurance policy and be certain that the policy is renewed on time every year.


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