Personal Finance

Flood insurance program could lapse in midst of hurricane season. What home buyers need to know

Key Points
  • The federal flood insurance program already has been reauthorized six times since September 2017.
  • When the program lapsed for a month in 2010, an estimated 1,400 home-sales closings were canceled or delayed each day.
  • In some high-risk areas, the only option for coverage is through the government plan.

With hurricane season under way, home buyers who plan to get flood insurance through the federal government might want to speed up their purchasing process.

Unless Congress takes action, the National Flood Insurance Program will lapse at midnight on July 31.

While existing policy holders would retain coverage if the program is not reauthorized, no new policies could be written. This means home buyers whose lender requires flood insurance could be unable to close on the purchase if they have no policy options.

Houses at the Highland Glen subdivision stand in floodwaters due to Hurricane Harvey in Spring, Texas, on Monday, Aug. 28, 2017.
Luke Sharrett | Bloomberg | Getty Images

"The main problem would be for people where there's no private flood insurance available," said Joe Resendiz, an insurance analyst with ValuePenguin.

Federal law requires home buyers in certain flood-prone areas to get a policy. Yet in many high-risk areas, private insurance is unavailable and the federal program is the only option.

A lapse would not be unprecedented.

The federal program, which provides flood insurance for more than 5 million homeowners, went without authorization for a month in summer 2010. During that time, an estimated 1,400 home-sales closings were canceled or delayed each day, according to the National Association of Realtors.

Source: National Flood Insurance Program, Federal Emergency Management Agency

Since September 2017 alone, lawmakers have enacted six short-term extensions.

"We've been hearing from some of our members where flood insurance is a big issue for their market. They aren't in panic mode, but there is concern," said Ken Wingert, senior legislative representative for the realtors' group. "The uncertainty is not helpful."

Additionally, homeowners whose policy expires after July 31 would be unable to renew it if the program expires. However, policy holders get a 30-day grace period, so they would at least have coverage for a month after their policy ends.

The House passed a bill last fall that would reauthorize the program through 2022, although the Senate has yet to act on it. Lawmakers have been divided over a variety of provisions in the measure, including how to expand the private flood insurance market, how to reform the claims process and how to fund improvements to outdated flood maps, Wingert said.

Top 5 highest-cost flood events since 2010

Flood event Year Total amount paid Average paid loss
Superstorm Sandy2012$8.7 billion$65,997
Hurricane Harvey2017$8.4 billion$112,964
Louisiana severe storms/ flooding2016$2.5 billion$90,725
Hurricane Irene2011$1.3 billion$30,366
Hurricane Irma2017$1 billion$45,421

Source: Source: ValuePenguin

The Atlantic hurricane season began June 1 and runs through Nov. 30. The National Oceanic and Atmospheric Administration is forecasting a 75 percent chance that the season will be near normal or above normal.

The agency expects 10 to 16 named storms and, of those, five to nine could become hurricanes. Subtropical storm Alberto, which made landfall in Florida in early June, was the first named storm of 2018.

Last year, the season included monster hurricanes Harvey, Irma and Maria. Combined, they caused $265 billion in damage, according to NOAA.

While most homeowners' policies cover wind damage, they generally exclude flood damage. Yet floods are often what cause the most destruction.

Shopping for homeowners' insurance

Even with coverage, there are coverage exclusions and limitations. For example, the federal program does not cover all your belongings in your basement beyond things like washers and dryers and water heaters.

It also takes 30 days for a federal policy to take effect. For homeowners who live in an area where the program is available, this means not waiting for storm clouds to appear on the horizon.

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If you purchase a policy through the federal program before July 31 and Congress does not reauthorize it in time, you would still have coverage once that 30-day period passes even if it falls after the deadline.

Also, the Federal Emergency Management Agency, which oversees the program, would still have authority to process claims if there is a lapse, according to a FEMA spokesperson.