My client is ready to make an offer on a new home, but do I know the home’s designated flood zone?
Great question! Homebuyers need to take into consideration the accurate flood zone
of a home when making their offer. Because it is so important, real estate professionals should confirm which designated flood zone the house truly is in before listing the property.
In 2012 Super Storm Sandy hit the East Coast. It wreaked havoc along the coastline and quickly deluged FEMA. Subsequently, in 2013 many of the coastal flood insurance rate maps were modified based on Sandy’s impact. Properties that once sat in low impact, “X” flood zones suddenly became higher risk “AE” flood zones. Even worse, existing “AE” flood zones became “V” flood zones. The “V” zone is similar to the “A” Flood zone in terms of risk, however “V” zones account for the high likelihood of tidal surge impact on a home as well.
Designated Flood Zones Change. Why is this important?
Recently we were referred to a family who had made an offer on a waterfront home in Fairfield County. They made the offer on the property with the assumption that it sat in an “AE” flood zone. The documentation that they received from the seller, which included a flood elevation certificate, the seller’s current flood insurance declaration page, and GIS map provided by the town, all of which showed the home in an “AE” flood zone. Neither the realtor nor the seller intentionally misled their potential home buyers. It was their assumption, based on the information in hand, that the flood zone was accurate.
In the course of our standard due diligence processes working with this home buyer, we used the information provided so we could offer rate comparisons. As a part of this, we ran a flood zone determination and discovered that in 2013 after Super Storm Sandy, the flood zone had changed from an “AE” flood zone to a “V” flood zone.
The cost of not doing due diligence.
As a home buyer, the information provided supports the offer. The buyer based their offer on the home being negatively-elevated in an “AE” flood zone. The cost of the policy is roughly $3,000 with FEMA/NFIP. In the “V” flood zone, the same flood insurance quote would now jump to $8,000 annually.
The seller could transfer the current flood policy to the buyer via FEMA’s assignment process, but the buyer concerns remain: What happens if the flood policy cancels? What if there is a claim on the home? Can FEMA adjust the rates to the “V” zone? Will the mortgage company even accept a flood policy in an incorrect flood zone? How does a change in flood zone impact the value of my house? How hard will it be to sell my home if it is classified in a “V” zone?
What happens if there is a flood claim on a home with a misclassified flood zone?
It is important to note that FEMA (NFIP) re-underwrites flood policies at the time of loss. They have the right to review the particulars of the property and then adjust the property coverage based on the premium paid for those particulars.
For example, if the homeowner is paying flood insurance rates on being in an “AE” zone of $3,000 ($250,000 of building coverage and $100,000 of contents coverage), but the home is later determined to be in a “V” flood zone at the time of loss, the NFIP will adjust the property coverage of the policy to reflect the premium paid. In other words, they will give you coverage based on the $3,000 spent on a policy that should have been $8,000 premium. Coverage effectively is reduced by more than 50%. Additionally, this causes another problem in a loss scenario worth considering. Underinsuring your dwelling coverage on a flood policy below 100% of the home’s replacement cost (or the $250,000 maximum flood dwelling limit) will result in the coverage changing from “Replacement Cost” to “Actual Cash Value” which is replacement cost minus depreciation.
What is the point, and why do real estate professionals need to think about this?
If you are a listing agent, a simple phone call to Daigle & Travers Insurance can help keep your closing alive. Before you list a client’s home, we can confirm the current flood zone and even provide rates. Additionally, we can give you an indication of past insurance claims that could impact the desire to purchase or the ability to obtain insurance.
You don’t want to get to an accepted offer and find out that the buyer is going to renegotiate the home’s purchase price based on some newly uncovered information or worse, they make a fear-driven decision and walk away altogether.
Lastly, purchasing homeowner’s insurance for a “FEMA noncompliant” home in a flood zone can be difficult. The buyer’s options for homeowner’s insurance are limited. However, we have carefully curated our carrier offerings to ensure we can provide multiple great options for these buyers. We represent over 30 property insurance markets, several NFIP/FEMA flood carriers, and numerous private flood markets as well.
Partnering with Daigle & Travers Insurance
Our goal is to be a trusted advisor to our clients and partner within the real estate community. We can help you help your client get to the closing without avoidable hiccups.
Let us help you. You close the deal, we write the insurance.
For more information reach out to Daigle & Travers Insurance. We have three convenient locations in Connecticut: Wilton, Darien, and Westport. One of our many experienced insurance professionals will be able to guide you through the insurance process.
You can contact us at 203-655-6974 or firstname.lastname@example.org.