Can I Be Self-Insured for Flood Insurance?

Under most policies, the default position for flood insurance is self insurance. This is true because flood damage is one of the most common exceptions named under homeowners insurance contracts. This means that you are personally responsible for the expenses caused by flood damage. However, it doesn't mean that you can legally or contractually go without additional flood protection.

Insurance companies set their premium rates according to how much damages are likely to cost them, and how likely the damage is to occur. They can keep rates reasonable by excluding specific events from the damages covered under a policy. Natural catastrophes of all sorts—including floods—are among the most common exceptions. Although not terribly common, they can mean an insurance company is on the hook for hundreds of claims at once, a situation that could bankrupt the company.

Self insurance is a financial situation where you have the money set aside to cover any damages you suffer in a loss. Those who have the money find it preferable, since deposits into an interest-bearing account are better than payments to an insurance company. In the case of flood damage, a typical homeowners policy leaves the policyholder self-insured for flood damage, whether or not he has the money to cover any damages.

The Federal Emergency Management Administration is the U.S. entity responsible for helping Americans in the case of a natural catastrophe or other disaster. To help flood victims, they have become the nation's largest provider of flood insurance. You buy flood insurance as you do other policies, offered by local companies and agencies but underwritten by FEMA via the National Flood Insurance Program.

If you live on top of a hill, or any other area unlikely to suffer flood damage, you don't necessarily need flood insurance and can be "self-insured." In areas that have regular flooding, or a high risk of flood, you might be legally required to carry some protection. Even without a legal obligation, your mortgage company, homeowners association or other body may include a flood insurance requirement in the contract. Under those circumstances, some organizations might accept proof of a certain level of cash reserves as a "self insurance" alternative to flood insurance.