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Flood coverage is a coverage not provided in the standard fire policy of your association’s insurance coverage. It must be purchased separately and it is a coverage that is both important and complex.
One great misconception of “flood Insurance” is that it is often confused with water damage, when a unit “floods” from a utility or appliance located within the association’s building. Flood Insurance covers damages from water entering into the subject property from an outside source, such as rainstorm, tidal insurgence or other natural disasters. HOA boards can be frightened at the costs of flood insurance policies, but these policies provide an incredible protection should there be damage done by flooding to the association’s property from natural disasters or other outside water sources.
There are a number of areas for HOAs to be mindful of with respect to flood insurance coverage, as ultimately it is the obligation of the HOA (if it is in a flood zone) to provide flood insurance coverage for the buildings located within applicable flood zones.
Some of these areas include, but are not limited to:
- Separate Policies. Unlike the master hazard policy, flood policies are issued and provided for each individual building within the project.
- Insurance to Value. Each building must be insured at 100% values (or the flood program maximum, which is $250,000 per unit, whichever is less). Knowing that the buildings are properly rated and scheduled is immensely important as a manager or board member. What does this mean? Unlike the master property coverage, flood insurance does not provide blanketed coverage for the property under a single policy. The association’s agent must submit building values for each building on-site, and the flood carrier will only pay out the specified amount for a given building. If the values for the buildings are underreported, there will be a coinsurance penalty equal to how undervalued the building is on the policy. For instance, if a building is only insured to 65% replacement on the flood policy, the carrier will only pay out 65% of the claim, after deductible.
- When reviewing flood insurance, it is very important to understand this and also ensure that the agent has submitted a proper schedule valuation.
- Maximum Deductibles. When units are mortgaged, the maximum deductible is $2,500. Many incorrectly written flood policies have resulted in individual unit owners being charged for “force-placed insurance” coverage by their lenders until satisfactory coverage is provided by the HOA.
- Federal Lending Issues. Communities that are seeking FHA approval, for example, will be denied if any of their building structures are designated in a Special Flood Hazard Area (“SFHA”) if satisfactory flood Insurance is not secured by the HOA.
- Narrow Scope of Coverage. Lastly, it is important to understand the protections offered by the policy. Flood coverage is very limited in nature and is not nearly as broad as the master hazard policy or even an earthquake policy, in most cases. This is particularly true when the policy is written through the National Flood Insurance Program or an equivalent policy form.
The complexities of a flood policy are numerous, and it’s always important to ask your insurance agent if your community is in a flood zone and whether the coverage provided (if any) is compliant with regulations of the U.S. Housing and Urban Development lending regulations.