'Under-Bought' Flood Insurance Proves Its Value

For nearly 40 years the federal government has made flood insurance available to property owners, filling a gap left by private carriers, which generally decline to write the coverage.

The program has grown controversial over the years. Critics have argued that it encourages Americans to build on beaches, flood plains and other sites that shouldn't be built on -- and wouldn't be if the government weren't willing to pay when such homes and vacation spots are washed away.

Nonetheless, as the New Orleans disaster illustrates, the insurance can be immensely valuable. Policies under the National Flood Insurance Program (NFIP) will pay up to $250,000 for residential buildings, plus another $100,000 for contents that are lost. It will also pay up to $500,000 for nonresidential buildings and $500,000 for their contents.

The premiums average around $400 a year for $100,000 of coverage -- higher in very flood-prone areas. That's quite reasonable, considering the risks.

Many mortgage lenders require it, at least for property located within a flood-prone area. Fannie Mae, for example, requires coverage of 80 percent of the replacement cost of the home, or the program limit of $250,000, whichever is less.

According to a recent study by the Center on Federal Financial Institutions (COFFI), a nonprofit think tank, the federal flood insurance program has about 4.6 million policies in place, covering more than $743 billion in assets. Annual premium collections run about $2 billion.

Still, the program is not as popular as you might expect.

"People don't buy insurance unless they have to, for the most part," said COFFI President Douglas J. Elliott. Also, he said, "I think there's been a certain fatalism, particularly on the coast of Mississippi [where just] one in four homes" is covered.

"That's just shocking to me, because it's cheap stuff," he said.

Federal flood insurance "is a greatly under-bought product," said J. Robert Hunter, who once headed the program as federal insurance commissioner.

But Hunter, now director of insurance at the Consumer Federation of America, said that while the program's penetration in Mississippi and Alabama mirrors national levels of 10 to 20 percent, it is much higher in New Orleans, covering perhaps half the houses there.

But "New Orleans is an exception," he said.