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MONEY AND THE LAW: Flood insurance makes sense, even in low-risk areas

October 14, 2013 Updated: October 14, 2013 at 7:00 pm
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I live a considerable distance from any body of water likely to overflow its banks. Therefore, flood insurance has always had a low priority for me. It ranks about as high as, say, asteroid strike insurance.

This year's rains, however, have caused me to revisit the issue, and I have now concluded that not buying flood insurance is a big mistake.

As we recently learned, floods don't always involve bodies of water overflowing their banks. They can be caused by heavy rain and take place in areas where flooding has never before occurred.

And your homeowner insurance (or renter insurance) doesn't cover damage to your home or its contents caused by flooding. If you look at your policy, you'll find a clearly stated (at least by insurance policy standards) exclusion for floods. As we also recently learned, damage from floods can be catastrophic.

So that brings us back to the subject of flood insurance. Congress created a national flood insurance program in 1968. It is administered by the Federal Emergency Management Agency, which sets the terms of policies and premiums charged by private companies that provide the insurance. Flood insurance is only available where a local government agency has agreed to abide by risk-management rules established by FEMA. Most of the Pikes Peak region is included.

People who live in areas identified by FEMA as having a high risk of flooding and who have a mortgage are required to have flood insurance. These people receive a "standard" policy that provides coverage for their dwelling in an amount determined by their lender and coverage for contents in an amount they select.

For people who live in a low- to moderate-risk zone, flood insurance is optional. There, a "preferred risk" policy, with much lower premiums, is available. Under a preferred risk policy, the property owner selects the amount of the dwelling and contents coverage.

USAA offers preferred risk coverage ranging from a minimum of $20,000 for a dwelling and $8,000 for contents to a maximum of $250,000 for a dwelling and $100,000 for contents. For coverage at the $20,000-$8,000 level, with $1,000 deductibles, the annual premium is $176. At the $250,000-$100,000 level, with the same deductibles, the annual premium is $460. That's about a fourth of what this coverage would cost in a high-risk area - and considerably less than the cost of repairing a damaged basement.

Flood insurance, like other types of insurance, can quickly get technical. Start with the basics at www.floodsmart.gov. The next step is to find someone at your current insurance company who can answer your questions and help you decide what level of coverage would be right for you. FEMA says the average flood insurance claim is $30,000, and 20 percent of claims come from low- to moderate-risk areas.

There is normally a 30-day waiting period before coverage is effective.

Now, about those asteroid strikes . .

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Jim Flynn is a private attorney with Flynn Wright & Fredman LLC in Colorado Springs. Email him at moneylaw@jtflynn.com.

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