Fix Costly Errors in Flood Insurance Quotes

As with other homeowners facing skyrocketing flood insurance costs, Jane Drake was shocked when the flood insurance premium on her South Carolina beach house climbed from less than $1,300 a year to nearly $20,000.

Soon after receiving the "outrageous" quote, she searched for ways to reduce her premium. She learned that her policy (and her new quote) was filled with technical errors. She had the mistakes fixed, her flood insurance premium was reduced drastically and she even got a refund for the years she had been overcharged.

Bottom line: Verify

Homeowners shouldn't assume that their flood insurance quotes and policies are accurate, Drake says, based on her experience. And they should seek to reduce their premiums.

"If something doesn't feel right with your policy, go back and have an expert evaluate the entire process and check your paperwork," she says. "So much of it has to do with how the insurance agent fills out the survey."

A huge decrease in coverage

The series of errors that led to such a huge increase in Drake's policy goes back to 2006. Her insurance agent notified her that, to keep her annual premium from skyrocketing, the coverage on her house was reduced from $250,000 to $19,000.

That's not a typo: Her coverage really dropped by more than 90% after the insurer updated some crucial data used to calculate her premium, including the flood zone for her house. The flood zones are based on flood maps created by Federal Emergency Management Agency, or FEMA, to determine flood risk.

An auditor saves the day

Last year, Drake was determined to restore the level of coverage that she had before. She didn't want to spend $20,000 a year to do so.

After numerous phone calls and after getting quotes for potential home structural improvements that she was told could reduce her flood insurance premium, Drake hired a consultant to audit the flood insurance paperwork.

The audit found incorrect information regarding the house's flood zone and construction date. Once the errors were fixed:

Drake's annual premium for full coverage dropped from nearly $20,000 to about $1,200.
The quote included the previous $250,000 in building coverage that she had before, plus an additional $100,000 to insure the contents.
She was refunded $4,300 for several years of overpayment.

How do errors like this happen?

It's hard to say exactly how these costly errors take place, says Lisa Jones, a certified flood insurance specialist and floodplain manager who audited Drake's insurance documents. Errors and typos sometimes go back many years.

"Agents and underwriters are just like us -- they make mistakes," says Jones, owner of Carolina Flood Solutions LLC.

The National Flood Insurance Program, or NFIP, is large and complex, making it potentially more susceptible to errors than other types of insurance, says Burl Daniel, a property and casualty insurance expert witness in Fort Worth, Texas.

A flood of acronyms

"Writing homeowners and auto insurance is fairly standardized for agents," Daniel says. "When you get into NFIP underwriting rules, FIRMs and the FEMA-NFIP website, there are a lot more factors to writing flood insurance than you might think."

Despite the complexity of the National Flood Insurance Program, federal regulators require insurance agents who sell the policies to take only three hours of training. Some states mandate additional flood insurance training. In other states, further training is optional.

What to look for in a flood insurance quote

Factors that can have a huge impact on your flood insurance costs include:

Elevation: Homeowners should have a FEMA elevation certificate done by a licensed surveyor or an engineer to determine the elevation of their home.
Zoning: Make sure the information used on your quote reflects the correct flood zone for your property. The high-risk flood zones have higher premiums and begin with the letter A or V. Moderate to low-risk flood zones begin with the letters B, C or X.
Coverage: Make sure the quote you are given is based on the value of the structure, not the value of the home and the land. This is especially important if you are trying to sell or buy a home. Potential buyers are often scared away by overpriced quotes, Jones says.
Age: The date of construction can be important. If your house was built before FEMA originally issued or updated the flood insurance rate maps in your area, you may be "grandfathered" and pay a lower rate.

Firmly in the zone

"For example, assume when you built or bought your house, you bought flood coverage with a FIRM (flood insurance rate map) in effect showing Flood Zone X," Daniel says. "If a subsequent FEMA-updated FIRM changes your house from Zone X to Zone A, you can keep Zone X with its lower premiums. However, keeping Zone X requires (that) NFIP insurance on your house was in force continuously since you bought the house."

Yes, it really is called Biggert-Waters

Flood insurance is turning into a burden for homeowners in flood-prone areas since passage in 2012 of the Biggert-Waters Flood Insurance Reform Act.

The overhaul would phase out some of the subsidized insurance rates that these properties used to receive. The changes were intended to restore financial stability to the program.

"Flood insurance has been a money loser for the government, big time," Daniel says.

Why it's a big deal for homeowners

For many homeowners, the cost of flood insurance -- which mortgage companies require borrowers to have if the property is in a high-risk area -- will become prohibitive when their premiums skyrocket.

President Barack Obama recently signed a law that delays the implementation of some of the increases until September.

"Congress has got to decide what they want to do with this," Jones says. "There are some changes that they have to make, and there has to be a balance between making the program affordable and making the program solvent. We haven't reached that balance yet."