What is Flood Insurance?
It has been found that just 20% of the homes in America that are actually at risk from flooding have flood insurance. There has to be some reason why. It may be because private insurance companies are not able to offer you insurance against the possibility of flooding, mainly because of what's known as adverse selection, referring to insurance purchased by those people affected by flood. When buyers and sellers have information that is very different when referring to the market process, you will end up with bad results that in turn can lead to bad customers and products alike. When it comes to flood insurance, the unfortunate truth is that the insurance companies will not be able to cover flood insurance cost when there are a larger number of claimants than there are people who actually desire to protect their property from severe flood damage.
It should be noted that the Federal Government has a requirement that any loan that is backed by a federal agency like the VA and FHA needs to have flood insurance to secure the loan itself. This is more present areas prone to flooding. It seems that the program was doomed to fail as an insurance policy due mostly to our previously mentioned adverse selection. Finding out that your standard insurance does not cover flood damage, after you are victim of a devastating flood, would be harmful to any homeowner. Another key point to make is this. You, as a homeowner, may have earthquake coverage, but does it cover flood damage that was caused by an earthquake? These are the type of questions to ask your insurance company when you purchase insurance. The National Flood Insurance Program would like to remind all of us that floods can be caused by a hurricane, earthquakes, landslides, or other natural disasters.
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