Wondering what does flood insurance cover, and how does the claims process actually work? I've interviewed several people who flooded in the Houston area over two years ago to answer these questions in this 3-part series.
Okay. So you've got a flood insurance policy, you've flooded, and you set into motion the claims process (check out Part I of this series if you need to review any of that or if you need to know what happens if you don't have flood insurance).
Here's where things might start to get interesting. Not necessarily in a studying-the-Mona-Lisa way, but more so in a navigating-retirement-account-withdrawal-rate kind of way.
Most of this + what does flood insurance cover you're not likely to find in the policy itself (here's a link to a standard flood insurance policy for reference), at least not in plain English.
This is the type of stuff that lands in your lap after the disaster actually hits and you're rain-boot-deep in paperwork trying to sort your life out.
So let's go over some of the sticky issues people can face after their home has been flooded as well as what does flood insurance cover.
Pssst: not a homeowner? Here's information about renter's rights when property has been damaged by flood.
Secure Temporary Housing
You have to remember that if you flood, chances are good many of your neighbors did as well. And many homes will become hazardous to live in. Some people can live with their relatives, while many others will need to relocate to apartments. We all know that an increase in demand leads to an increase in price, which means that any money you receive as rent/house assistance from FEMA or elsewhere is likely not going to go as far as it could have pre-flood.
For example, Pat was able to find a place to rent just four minutes from her home. However, the monthly cost is $1,900, and I've been told by others that the housing assistance offered by FEMA is $721/month.
There are limitations, both financial and geographical, to this lifeline as well. Leonor Rouse stayed with family and friends, and said that the TSA locations offered were pretty far from her area. She received rental assistance for two months, but will be ineligible for more because “…our rental and mortgage is below 30 percent of our income.” Ultimately, she was “…forced to get a one year rental since short term rentals are not in our price range in the area.”
Leonor's situation brings up another great point: unless you've managed to pay off your mortgage, your mortgage company still expects you to pay your monthly mortgage + escrow whether you're living in your home or not.
Pay Your Deductible
Most policies come with a $1,000 deductible on the building, and a $1,000 deductible on the contents (some newer policies have $1,250 for each). Hopefully you've got this stashed in an emergency fund somewhere earning that <1% (oh, for the days of 5% interest on savings accounts…).
Wait to Make Any Decisions Until it's Determined if You Meet The Dreaded 50% Rule
This one's a biggie that has caught many homeowners by surprise (myself included). Leonor says, “[m]ore than anything I wish I had known about the 50 percent substantially damaged and improved constraint to force an owner to comply with elevation requirements. I would not have purchased the property had I known.”
FEMA has a rule (here's the plain English explanation) that if your home is in a flood hazard area, and is damaged at 50% or more of its appraised value, then you have to jump through a whole lot of hoops to move forward after flooding. As in, you have to elevate your home to a certain level, as well as bring it into compliance with the current building codes in your flood zone. Your options become either to elevate (very costly; one man told me he was quoted $125,000 to get the elevation he needs; others have said that companies will not elevate over a certain footage, forcing them to pick one of the other options), relocate, demolish, or floodproof.
Here's the thing though — remember how I detailed how you can fight property taxes by getting your appraisal lowered? The City of Houston used tax appraisals to determine this 50% threshold, not market appraisals, which can be substantially higher (for example, our tax appraisal is $165,499, and our market appraisal is $186,531).
So if you are around 50% of damage, then it is probably in your best interest to get a private appraisal done on your home, as this will give you more leeway to get under that 50% threshold. You would do this through a “Substantial Damage Determination Appeal”.
Also, your flood insurance policy includes $30,000 for an Increased Cost of Compliance if you are at 50% or higher damage. However, this is still within those $250,000/$100,000 limits. So if you maxed out that $250,000 on your claim, then you cannot get more money to help with the cost of compliance.
Note: the other reason to hold off on decision-making until you decide this point is because you could throw away good money. For example, you don't want to start an expensive remediation process only to find out halfway through that you have to demolish your home.
Brace Yourself for The 80% Rule
On top of bracing yourself for an Actual Cash Value (ACV) assessment of your personal property items rather than replacement costs (so you might get $100 for a couch instead of the $500 it will cost to buy a new one), you might be in for an even worse surprise with what does flood insurance cover.
As explained to me by an insurance agent who wishes to remain anonymous, “You must insure your home for either 80% of its replacement cost or $250K maximum coverage, whichever is less in order to receive the full ACV of your damages. For example, if you have a $500K home, 80% is $400K. So therefore you must carry the $250K limit. If you do not insure your home for at least 80% of its replacement cost, then your damages will be pro-rated by the percentage of coverage you carried.”
So that $100 for your couch could come in at even less if your percentages are off.
Decide if You'll Get Your Own Quotes to Account for Your Adjuster's Shortfalls
Your adjuster likely uses the software Simsol when they determine what it's going to cost for your home to be restored. This database does not account for the locally inflated labor + supply costs you're going to come across from everyone needing the same, suddenly-more-precious-than-gold, construction materials.
One drive down my street, and you'll see no less than four handwritten signs promising black-market supplies of unlimited sheetrock materials, for example. This is why Mostyn Law firm suggests (and to be honest, what several adjusters suggested to homeowners “off-the-record”) that you get your own quotes as they will likely be 10-20% higher (re: more realistic) than what your adjuster can do for you.
Assess Your Finances and Figure Out The Loan Versus Possible-Grant Conundrum
You're probably starting to see just how expensive getting a home repaired post-flood can be, especially if an adjuster has been out to your property and you've learned the financial limits of your policy.
Chances are you will need to pay for substantial chunks out of your own pocket to do so. The Small Business Administration offers Disaster Loans at low interest rates to help with costs post-flood. Some homeowners need to turn to these because they simply can't hold out for what, if any, grants get approved to help with the substantial costs of things like elevating homes.
The conundrum? One man I spoke with told me that if you apply and receive an SBA loan, then you will be ineligible for a grant if one gets approved later on.
“Unfortunately, the gentleman you spoke with is correct. Federal law prohibits a homeowner from receiving federal assistance after a disaster from more than one source. If someone takes out an SBA loan now, they will be ineligible for grant assistance should it become available down the road. This has put many homeowners in a bind in regards to what they should do,” says Catherine Dunn, the district director for Texas State Representative Sarah Davis.
So how long might you have to wait (and by wait, I mean potentially pay rent on top of a mortgage for a home you may not be able to live in)? According to Catherine, FEMA Flood Mitigation grants and Hazard Mitigation grants showed up 3-6 months after Hurricane Sandy to the state of New Jersey, and the average turnaround time, if there will be funds, is 8 months.
…Or, Decide if You'd Like to Take Advantage of the Flippers Roaming Your Streets
You can't blame people for trying to capitalize on an opportunity, especially when doing so may relieve a flood-devastated homeowner with the option to walk away.
However, be very wary of what you're being offered and communicate with your neighbors. I sat next to a man at the law firm meeting, and he told me he had received an offer on his home that was in line with true market value. And he took it. He was a happy customer (perhaps not ‘happy', as having to walk away from his home before he was ready is quite an emotional thing, but certainly he felt like he had a pitcher of lemonade from a bowlful of lemons).
However, he spoke with another neighbor who received an offer that was a whopping $110,000 less than his. He was quickly able to communicate with her — as she only had 48 hours to accept/deny the offer, for whatever reason — that she was getting a raw deal.
A disaster is not the time to withhold precious information from your neighbors, and you'll likely benefit from being able to air some of your emotions anyway, so strike up that conversation.
Be Prepared for Who Gets Your Insurance Claim Check
When you're figuring out what does flood insurance cover, you're probably not thinking about the actual check itself. So I'll give you a heads up.
If you own your home outright, then you will get the insurance claim check.
And if you don't own your home outright? Any insurance check will likely be made out to you + your mortgage company. In fact, when our own home flooded and we submitted our first FEMA flood insurance claim, our check was made out to Wells Fargo, my husband, and myself since we're both on the title of the loan. And yes, we both had to sign the document as well as a Wells Fargo representative.
It's the mortgage company who wants to make sure you get the repairs done or pay off the mortgage and they'll send you any leftover from that check for doing so. In fact, we also had to sign a paper stating that we would make the repairs and be open to inspection by a Wells Fargo rep within 120 days of receiving the check.
In Part III of this series, we'll look at our personal flood insurance policy (USAA offers flood insurance policies, fyi) to determine how we would have fared just a few blocks away, as well as detail how you and your family can better prepare for a flood in the future.
Flood Insurance Crash Course Series:
Flood Insurance Crash Course Part 1: Do I Need Flood Insurance?
Flood Insurance Crash Course Part 2 : What Does Flood Insurance Cover + What the Claims Process Looks Like
Flood Insurance Crash Course Part 3: How It Would have Gone if We Had Flood Damage
Flood Insurance Crash Course Part 4: 10 Surprising FEMA flood Claims Money Realities I Learned
Flood Insurance Crash Course Part 5: We Submit Our First Flood Insurance Claims Process