The Flood Fiasco

By Daniel Kadlec

The irony of insurance is that mostly it protects against things we can control but not against things we can't control. Whoops! Burn down the manse with an unattended iron, and the typical policy covers you. But if heavy rain overwhelms a storm sewer that backs up into your home or business and destroys all, well, sorry. Claims adjusters are now delivering that message to thousands of people, including the Kadlecs, trying to wring out Hurricane Floyd from their carpets.

Needing cash, they get words.

The shame is that in the vast majority of such cases, financial pain is avoidable. While flood insurance is routinely excluded from almost all policies, it is widely available--on request--and at rates that make a lot of sense. Why don't more people have it? One problem is that they don't understand how insurers define flood. I'll get to that, and, trust me, Webster would choke on the description. An even bigger problem is that insurance agents have little incentive to write flood coverage. Meanwhile, many agents and local officials are so ill informed that they mislead entire communities into believing that flood protection is impossible to buy.

The upshot is that only 1 in 4 homeowners is covered for a potential catastrophic loss even though most properties are vulnerable. Consider: half of all Americans live within 50 miles of an ocean. The insurance industry recognizes that we are woefully underinsured for flood damage. And the industry has its own list of reasons for why that's so. Banks usually don't require the coverage but probably should. The Federal Government often jumps in with emergency assistance, a disincentive for paying for coverage. And policyholders fail to read the fine print and mistakenly believe they're covered.

No doubt these are contributing factors. But let's get back to the functional definition of a flood. To most people, it's an overflowing river, lake or reservoir. To insurers, it's any water that enters a building from the floor, no matter what the source of the water. In a hard rain you can get flooded on top of a mountain. That's not widely understood. Even less appreciated is the Federal Government's role as the sole underwriter of flood insurance since 1969. Almost any agent can offer the coverage on behalf of the government, but the agent gets only a handling fee that barely covers the paperwork. Insurers make money by collecting premiums and investing--not by shuffling paper for Uncle Sam. Without a financial motive, even the most thorough agents may view flood coverage as a bother, especially in low-risk areas.

So don't count on your agent (though that's the best place to inquire first). Unless you live on a hill in a desert, you probably should have flood coverage. The cost varies widely, based on an intricate zoning system, but the average flood policy in force goes for $341 a year for $119,254 of coverage, according to the National Flood Insurance Program. All business and property owners are eligible unless their community is among the 8% nationwide that do not comply with federal guidelines on construction in high-risk zones. To find out if your community complies, and for a referral to a nearby agent who will write flood insurance, call 800-427-4661. With so much misinformation out there, you should be ready to do your own legwork--or end up all wet.

See time.com/personal for more on flood insurance. E-mail Dan at kadlec@time.com See him Tuesday on CNNfn at 12:45 p.m. E.T.