One inch of floodwater can cause $25,000 in property damage, according to FEMA—and the cost of a severe flood can be financially devastating. Having flood insurance allows homeowners and businesses to recover at least some of their losses and rebuild. Since homeowners’ insurance and business insurance policies don’t cover flood damage, real estate attorneys and insurance agents generally advise clients to buy flood insurance when buying real estate. It’s a significant expense to be sure. But since no property is immune to flood risk, flood insurance isn’t an expense that property owners can afford to avoid.
Do I Have to Buy Flood Insurance?
First, some background. Throughout the U.S., flood insurance is primarily sold by FEMA’s National Flood Insurance Program (NFIP). The NFIP provides flood insurance policies through a network of insurance agencies.
FEMA maintains flood maps for communities throughout the U.S., called Flood Insurance Rate Maps (FIRM). FIRM data determines whether a particular area is in a low-to-moderate-risk flood zone or a high-risk flood zone. These maps are redrawn over time, so a property that was once in a low-risk zone may be “upgraded” to a high-risk zone.
Any time a buyer purchases property located in a high-risk flood zone, their lender generally requires them to obtain flood insurance. Lenders may require buyers to obtain flood insurance for properties in low- or moderate-risk flood zones too. Even if it’s not required, your real estate attorney and insurance agent may advise buying flood insurance when purchasing a home or business in one of these zones, since there’s some flood risk with any property. (In fact, FEMA says that one in three flood insurance claims comes from low- or moderate-risk areas.)
What flood insurance covers depends on the nature of the property. For homeowners, FEMA’s National Flood Insurance Program policies cover up to $250,000 in damage to the building and up to $100,000 in damage to the building contents. For businesses, flood insurance may cover up to $500,000 in building damage and $500,000 in damage to the building’s contents.
What Does Flood Insurance Cost?
Because FEMA essentially has a monopoly on flood insurance, property buyers don’t have a lot of options for negotiating lower rates. “There is no competition, really,” says John Delano, a Boston-based insurance and risk advisor with Bender Hatch who works with individual and business buyers who need flood insurance. “FEMA sets the rates for flood insurance. With the flood insurance you buy, in most cases, the rates are fixed and established.” (Some private flood insurance options do exist, but FEMA’s NFIP insurance dominates the marketplace.)
So what will flood insurance cost you? Although FEMA’s rates are fixed, there are a lot of variables that determine your flood insurance premiums. These variables include your location, your chosen deductible, whether you submit an elevation certificate and/or whether you’re able to take advantage of grandfathering. One 2021 analysis found that the Massachusetts average for flood insurance premiums was $1,294 per year, significantly more than the national average of $734.
A recent change to the way FEMA prices insurance may also affect your premiums. In October 2021, FEMA implemented a new methodology for setting more equitable flood insurance rates, called Risk Rating 2.0. With this methodology in place, 39 percent of Massachusetts flood insurance policies will have premium decreases and 49 percent of policies will have premium increases of up to $120 per year.
Flood Insurance and Building Elevation
Until the implementation of Risk Rating 2.0, buying a new flood insurance policy required an elevation certificate. A land surveyor, engineer or architect can complete an EC, which provides information about a building’s lowest point of elevation and flood zone.
FEMA will no longer require an elevation certificate when you buy a new flood insurance policy—but completing one may still be beneficial. For one thing, your insurance agent may be able to use your elevation certificate to secure lower rates for your flood insurance. And, for buyers who are considering demolishing and rebuilding properties, completing an elevation certificate provides useful information about where the new building should be constructed to raise it out of a high-risk flood zone.
Changing a property’s elevation can significantly lower insurance costs. For example, Delano has a customer who bought a home right on the water in Hingham. Its lower level put the house in a high-risk flood plain, and his customer was looking at flood insurance premiums of $8,000 or $9,000 a year. The buyer ended up tearing down the house and building a new home on pilings. Moving the lowest elevation of the home out of the flood plain dropped his flood insurance to around $800 a year.
Flood Insurance and Grandfathering
Grandfathering is another potential strategy for lowering flood insurance costs. It allows a seller to assign their existing policy to their buyer, locking the buyer into the seller’s flood insurance rate. This can be helpful if the area’s flood maps have changed and the flood risk has increased since the seller originally obtained their policy. (Properties must meet certain conditions in order to be eligible for grandfathering.)
Buyers have to be proactive about grandfathering, especially in Massachusetts: Sellers aren’t legally required to disclose any information about a property’s flood risk or previous flood damage, or tell a buyer about the existence of their flood insurance policy.
And Delano says that the complexities of flood insurance isn’t something most buyers are attuned to. If a buyer has never purchased property in a high-risk flood zone before, they might not recognize the opportunity for grandfathering.
This is one of the benefits that working with knowledgeable insurance agents, Realtors and real estate attorneys provides. They know what questions to ask. “If you came to me and said ‘I’m buying this house in Chatham,’ I’d tell you to ask the current owner if they have an existing flood policy,” Delano says. “And if they do, let’s grandfather that.” Your insurance agent can walk you through the process.
From the seller’s side, having the ability to grandfather an existing flood insurance policy makes your property more attractive to buyers. “A word of advice I always give my customers is, if you have a flood insurance policy on a home in a flood plain, never let that lapse,” Delano says. “It will affect the sale of your home because of grandfathering. If you let that policy lapse, the next owner is going to have to pick up a flood policy at the most current rates.”
Flood insurance is just one of the many lesser-known issues that buyers and sellers have to consider when entering into real estate transactions. Working with knowledgeable real estate attorneys and insurance agents is the best way to make sure you have the full picture of your financial obligations when buying or selling property.
The real estate attorneys at Sassoon Cymrot Law, LLC, work with individual and business clients to make informed decisions at every stage of the transaction. If you have questions about flood insurance or anything else relating to real estate transactions, contact me today!