Heavy rains hammered California, causing billions of dollars in damage. But less than 2% of homeowners in the state have flood insurance.

Heavy rains hammered California over the Christmas and New Year, causing billions of dollars in damage. But the bad weather also revealed how vulnerable homeowners are becoming to the unpredictable effects of climate change.

Yet few homeowners in the state were adequately prepared for flooding. According to federal data, 192,404 homes in California have an insurance policy in force specifically for flooding, out of 14.5 million homes. That’s less than 2%.

Prior to the rains, wildfires and droughts were the prevalent pain points for homeowners in California. Rains here and there also brought landslides and mudslides, but not flooding specifically. 

Homeowners are now concerned about future damage. At St. Petersburg-based Neptune Flood Insurance, business from the state of California jumped 600% in the last few weeks. 

Some 192,404 homes in California have an insurance policy in force for flooding — that’s less than 2% of 14.5 million homes.

“These are largely being bought by people who had close calls — their neighbor or someone in the same town may have experienced flooding,” Trevor Burgess, chief executive of the company, told MarketWatch. 

“It’s a reminder of what can, and what does happen, and what will happen with increased frequency due to climate change,” Burgess said.

Home insurance rates depend on the risk to the home, Burgess said. For instance, if his company quotes a homeowner $300 to $400 in premiums per year, “then you’ve got a pretty low-risk property,” he explained, as opposed to having been quoted $13,000 a year.

The average cost of flood insurance is $700, according to the Federal Emergency Management Agency, or FEMA.

Flooding and heavy snows will cost the state between $31 billion and $34 billion, according to one early estimate by AccuWeather Inc. This includes the impact of power outages, landslides, fallen trees, and road closures.

The company expects these costs to rise further as more storms sweep through the state. 

“We’ve always had weather variability. We’ve always had these types of floods,” Tom Larsen, associate vice president, hazard and risk management at CoreLogic, told MarketWatch.

“This is a weakness that puts us at risk,” he added, “and a home is the biggest investment that many people own.” 

Flood waters inundate a home by the Salinas River near Chualar, Calif., on Jan. 14, 2023, as a series of atmospheric river storms continue to cause widespread destruction across the state.

(Photo by DAVID MCNEW/AFP via Getty Images)

What’s covered by home insurance?

Most homeowners are not aware that their current insurance policy doesn’t necessarily cover events like flooding, said Roger Grenier, senior vice president of the global resilience practice at Verisk, a data analytics and risk assessment firm.

And people also “may assume that OK, well, I understand my homeowner’s insurance doesn’t cover flood, but if I have a flood the government will give me some assistance to help out,” Grenier said. “And that’s proven to be a huge misconception.”

Unlike Florida, which frequently experiences bad wet weather events, California has mostly seen drought and wildfires.

Consequently, only a fraction of homes in California are insured specifically for floods.

It’s an added expense: Californians already pay for homeowners’ insurance, which does not cover floods. Some also pay for fire insurance, and even earthquake insurance, which occur more frequently in the state.

And for those who do get flood insurance, sometimes the coverage can be insufficient. 

The National Flood Insurance Program, or the NFIP, offers a policy to homeowners that covers up to $250,000 for a property.

The National Flood Insurance Program, or the NFIP, offers a policy to homeowners that covers up to $250,000 for a property.

The NFIP is managed by the federal government and offers homeowners, business owners, and the like, the option to purchase federally-backed insurance policies.

It covers direct physical loss to the property from a flood, which includes overflow of inland or tidal waters, and mudflow. It doesn’t cover sinkholes, or landslides.

Generally, $250,000 amount is enough to cover damages, but in California, where home prices can be exorbitant, the NFIP doesn’t do much, particularly in the case of severe damage. 

Mudflow is covered by flood insurance. In fact, one of the largest payouts last year for a home in California, which experienced severe damage due to a mudslide, was over $600,000, Neptune’s Burgess said.

Flood insurance also doesn’t just cover floods. According to FEMA, anyone living downhill from an area that was recently hit by wildfires will be at risk of mudflows.

“The fires killed plants that absorbed rain with roots that held the soil together. With nothing to hold the earth together it may not take much rain to turn the soil into a mudflow that could be flowing straight toward your house — if you live downhill from a fire-scorched area,” FEMA said in 2020

And “since California has not experienced any recent large flooding events due to several years of drought conditions, it’s natural for some people to develop a false sense of security over the need to purchase flood insurance,” a spokesperson a the Federal Insurance and Mitigation Administration, told MarketWatch. 

“It’s just too risky to continue to make those assumptions in light of climate change,” they added.

FEMA said that it would continue “robustly” pushing flood insurance nationwide to improve rates. 

Outdated flood maps used by homeowners

Part of the reason for people not believing that they need flood insurance is due to reliance on “badly out-of-date” federal flood maps, according to the R Street Institute, D.C.-based free-market think tank.

Homeowners and buyers in America generally rely on FEMA’s flood maps, which indicate how likely it is that their area will flood. 

But these maps aren’t going to be enough in an era of climate change and unpredictable weather, experts said.

The maps “fail to acknowledge the ways changing climactic and development patterns (such as the capacities of local drainage systems or the amount of impermeable ground cover) have shifted the risk of flooding,” the R Street report elaborated.

FEMA’s flood maps are not going to be enough in an era of climate change and unpredictable weather, experts said.

Plus, the maps only reflect past flood experience, and don’t reflect how climate change and rising sea levels heighten the likelihood of flooding.

Freak weather can throw off homeowners. During Hurricane Harvey, 40% of the homes that flooded in Houston, Texas, were in zones that were considered low risk, according to a report by the New York Times.

Because of these maps, people fall into a specific line of thinking, said Verisk’s Grenier.

“So if I’m in this flood zone, therefore I have flood risks. And if I’m outside of these special flood hazard areas, and I don’t have flood risk —  that’s really a huge misperception,” Grenier told MarketWatch.

FEMA has been updating its maps by introducing a new pricing methodology called “Risk Rating 2.0” which is more nimble. 

The new model uses more variables to try to get a better sense of who’s at risk, and by how much. For instance, the new risk rating method looks at the distance to a water source, elevation, as well as the cost to rebuild.

“The best indicator of a property’s flood risk is the price of the insurance premium. Under the NFIP’s new rating methodology, prospective policyholders should be confident that the rate they receive reflects an accurate picture of their property’s risk and is priced accordingly,” the FIMA spokesperson said.

Neptune, which uses proprietary data to determine flood risk, says that ultimately, the price quoted by the insurance agent best reflects a homeowner’s vulnerability.

According to a report by University of California, Davis, the new methodology raised premiums for 77% of NFIP customers across the country.

In the San Francisco Bay Area, “many low-lying coastal areas will see premium increases, while the foothills will experience significant discounts,” the report stated.

The increases are in the $5- to $7-a-month range in South San Francisco, Pacifica, and Millbrae. Oakland Hills, San Ramon, and other mountainous areas will have decreases of more than $20 a month.

For homeowners affected during these recent floods, California’s Department of Insurance gave two pieces of advice: First, if there is water damage, the CDI asks homeowners to check with their insurance company representative to see if they are covered. Second, it asked people to reach out if they had questions about what homeowners insurance covers, at insurance.ca.gov.

Neptune Flood Insurance’s Burgess said, “There’s a real opportunity coming out of a terrible tragedy, such as what’s going on in California, to think about how we educate insurance agents and homeowners in California about the real risks they face.”

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