How does flood insurance work?


Flood damage poses a risk to Canadian homes now more than ever. Find out how flood insurance works and if you need it, so you won’t be left high and dry.

How does flood insurance work?

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Flood insurance offers you, as a homeowner or renter, financial protection in the event of damage to your living space due to a flood. It may sound simple enough, but it often gets confused with water damage, and the two are significantly different when it comes to coverage. And since instances of floods are on the rise in Canada, you’ll want to know if you need to add flood insurance coverage to your home insurance policy.

What is flood insurance?

Flood insurance addresses the damage caused by either of the following two types of floods: Overland flooding and sewer backup.

Overland flooding is defined as a large quantity of water flowing over land that is typically dry and may be caused by natural circumstances such as heavy rainfall or snow-melt runoff or by a burst dam.

Then there’s sewer backup, which is when wastewater flows back into your house from the city’s main sewer lines, typically seeping up into your basement through your floor drains. It can happen when there’s a blockage in your plumbing or sewage systems. Sewer backup requires specific coverage and is treated differently than something like a burst pipe (which is typically covered by your home insurance policy). You’ll need to get sewer backup coverage added onto your insurance plan, and ensure that you have a sewer backup valve installed (not doing so would be classified as poor maintenance). 

Both types differ from general water damage, which is a standard component of most homeowner policies and is defined by the insurance industry as clean water that suddenly and/or accidentally enters your home from a source other than the ground or a sewer. For example, if a pipe bursts or if your dishwasher overflows, flood insurance wouldn’t cover it. But your home insurance does. (Found water damage? Find out if your insurance will cover it here.)

Why is flood insurance suddenly important? 

In Canada, major floods have been so historically rare that flood insurance was only available to purchase for commercial properties. For decades, Canada was actually the only G8 country not to offer residential flood insurance. However, flooding is on the rise in Canada, having increased in frequency every decade since the 1940s. In fact, as many major inland floods took place in the nine years between 2004 and 2013 as in the 44 years between 1955 and 1999. Consequently, the Canadian insurance industry finally introduced overland flood coverage for homeowners in 2015. And just last year, the Government of Canada created a task force specifically for exploring the possibility of a national flood insurance plan.

Watch: MoneySense – Home Insurance & Climate Change

Does my house insurance cover a flood, or do I need a special flood insurance policy?

If you didn’t specifically request flood coverage when you purchased your home insurance policy, chances are you don’t have it. “Flood coverage is what’s known as an ‘endorsement,’ meaning it’s an addition to your policy,” explains Linda Dolan (CAIB), owner of Alport Insurance in Port Alberni, B.C., and vice president of the Insurance Brokers Association of Canada. What’s more, this applies to renters as well as homeowners. If you purchased your policy prior to 2015, flood coverage was not an available option then.

If you’re curious about adding flood coverage to your existing policy, your broker or insurance company will be able to tell you how much it will cost and if you qualify for it. Here’s more about how those defining factors are determined.

How much does flood insurance cost?

Think of the cost of flood insurance like you would with earthquake insurance—the price is determined by location. Those who live on the coast of British Columbia are most in need of earthquake insurance, and therefore they pay more than other Canadians. Similarly, when you inquire about purchasing flood insurance, an insurer assesses your home’s risk of damage, based on the history and likelihood of flooding in that area. Needless to say, the price tag can vary wildly.

“Insurers assess your risk by postal code,” says Dolan. “That’s how they come up with premiums. The higher the risk, the more you’re going to pay.” Additionally, “If you live on the 30th floor of a high-rise, your risk of overland flood damage is obviously much less than someone who lives at ground level.” (Not that tall buildings can’t be affected by flooding, they may still be deemed uninhabitable. Check with your individual insurer about what is covered for additional living expenses in such cases). 

“Unfortunately, about 10% of Canadians can’t purchase flood coverage because they’re in such a high-rated flood zone,” adds Dolan. Meaning either its price is too prohibitive or insurers will simply decline to offer it. According to an Insurance Bureau of Canada estimate, in 2019 only 39% of Canadian homeowners had access to overland flood insurance.

Dolan also points out that when shopping for a homeowners policy that includes flood insurance, be aware that some insurers impose a maximum dollar amount to avoid a large payout, in the event that a home sustains extensive damage or is destroyed. “Some insurers are becoming more selective about overland flood. They’ll offer it, but they’ll put a limit on it, like $50,000,” says Dolan. “As brokers, that makes us nervous, so if we can find a company that doesn’t put limits on it, we prefer that.”

Your deductible (the amount deducted from your insurance claim) may also vary greatly, from as little as $1,000 to as much as $50,000. The higher the deductible, the lower your monthly premium should be.  

How does flood insurance work and what does it cover? What about flood insurance contents coverage?

If your homeowners policy includes a flood insurance endorsement, you’re protected against loss or damage to your property and contents. But the nature of your coverage—including exclusions—depends on your insurer and where you live. For instance, some insurers offer coverage only in certain provinces, some exclude damage as the result of a tsunami or dam break, and some won’t insure you if your home has a reverse-sloping driveway. When you shop for your policy, you may opt for a basic endorsement that covers, say, sewer backup or a comprehensive plan that covers all possible flooding scenarios (minus any exclusions your insurer stipulates).

You may want to ensure that your policy also includes compensation for living expenses, should your home not be habitable in the aftermath of a flood. “Then you’ve got additional money to stay in a hotel, and purchase meals and other things you need for everyday life,” says Dolan.

Do I have to make a claim if my flood damage is minor?

Some homeowners may be tempted not to file a claim with their insurer if flooding has caused only minor cosmetic damage, or if repairs can be fixed by the homeowner. But Dolan recommends contacting your insurer, which will probably want to dispatch a professional to inspect the damage and make sure it’s not worse than it appears. “To you and I, the damage might not look substantial. But if it gets into the walls, mould could be a huge issue.”

How do I know if I need flood insurance?

Frustratingly, much like Canada’s belated response to introducing overland flood insurance, our country hasn’t done a good job of providing easily accessible maps and other resources that help homeowners determine if their location is at high risk for flooding — and those that do exist may be either out of date or hard to understand. Your city or county may be able to provide this information, but if that fails, your insurer may be able to help. (Learn more about how to determine if you need flood insurance here.)

While flood insurance isn’t mandatory for homeowners, you should seriously consider it even if your risk is relatively low. In recent years, unprecedented, catastrophic flooding has occurred in Toronto and Southern and Central Alberta, and environmentalists speculate that climate change and urban sprawl will only increase the frequency of this type of event. Contact your insurance broker or provider to find out the options available to you. As Dolan points out: “If, all of a sudden, there’s a flooding threat in your area, you can’t phone your broker that day and get flood insurance.”