Flood Insurance: Why dont insurers assume this risk and why dont homeowners purchase the coverage - Essay Example

Insurers do not want cover floods and homeowners do not purchase coverage due to the expense. Flood damage can be extensive. A flood can render a house totally inhabitable. This damage can be obvious water damage and a deadly subtle mold. Insurers do not want to take this responsibility. Thus the government created the National Flood Insurance Program, where private insurers offer flood insurance that is backed by the Federal government. Still the cost of this insurance make homeowners think twice about obtaining the insurance policies, especially in areas with low flood risks.

Due to cost both insurers and homeowners do not want to participate in flood insurance. Insurers do not want to assume the risk of flood insurance due to expense. Without the National Flood Insurance Program subsidy, some private insurers refuse to provide flood insurance (Birkland 107). This was the case in the instance around the Green River Valley after the Army Corp of Engineers reported the intentional releasing of water of the Howard Hanson Dam due to fears of high waters making the damaged dam fail (Welch).

The Army Corp of Engineers had to release waters creating a small flood, or risk losing the whole dam and causing a major catastrophe flood. As a result, private insurers without the backing of the National Flood Insurance Program dropped homeowners in the Green River Valley. The Federally funded insurance remained an option, but at a fixed value. Homeowners would only receive a set amount of compensations, no matter what the homes are valued at. Homeowners likewise do not want to buy flood insurance due to expense.

Flood insurance costs around $650 a year (FEMA 2). When homeowners live paycheck to paycheck an extra $50 to $75 a month for insurance that will not pay for all expenses of a flood, the insurance suddenly does not seem like a good idea. This is especially true in low risk areas. Homeowners do not conceive that floods could occur in areas like South Nevada and other dry areas. The truth is plumbing failures, air conditioning failures, and other flood damage can occur even in the desert. The extra money paid out seems like a waste in these areas until a water heater corrodes, or a sink faucet breaks shooting water until contained.

The damage of floods can be extensive. Normally, depending on type of flood, floods render homes a total loss. The water damage is a given, but mold can have a house condemned. Most floods cause not only personal property damage, but home damage as well. Insurers do not want to pay out thousands of dollars on floods, when receiving less than $1000 a year. Insurers are a business, not a charity. Many homeowners think that in a flood disaster FEMA will compensate them, or even provide them loans.

The truth is only a presidentially declared national disaster area will receive help (FEMA 2). Everyone else must fend for themselves. Even if FEMA does compensate or gives loans to homeowners, the homeowner is required to participate in National Flood Insurance Program to receive help (FEMA 2). Another myth is flood insurance is not available in hurricane zones, like New Orleans. This is not true. Flood insurance is available in every community participating in the Federal Flood Insurance Program, except for “Coastal Barrier Resource Systems” (FEMA 1).

Policies normally do not go into effect for 30 days, due to the possibility of a homeowner trying to insure the day before a big storm (FEMA 2). Insurers and homeowners do not want to bear the expense of flood damage. This is due to the cost of damage, probability of floods, and the loss of money on both sides. Flood insurance is a no win situation on both sides. Insurers lose money due to high payout rates. Homeowners lose due to low payout amounts. Flood insurance is something that would not exist without the National Flood Insurance Program.

Works CitedBirkland, Thomas A. Lessons of Disaster. New York: Georgetown University Press, 2006. Print.FEMA. “National Flood Insurance Program: Myths and Facts about the National Flood Insurance Program.” July 2007. FEMA. 22 Nov. 2009 http://www.fema.gov/library/viewRecord.do?id=3002. Online.Welch, Craig. “Flood insurance dries up for Kent Valley companies.” 29 Sept. 2009. The Seattle Times. http://seattletimes.nwsource.com/html/localnews/2009961102_floodinsurance26m.html Online.