Georgia Property & Casualty Practice Exam

Which type of insurance is typically required by lenders for homes in flood-prone areas?

1. Earthquake insurance

2. Flood insurance

3. Standard homeowners insurance

4. Comprehensive homeowners insurance

The correct answer is: Flood insurance

Flood insurance is typically required by lenders for homes located in flood-prone areas due to the specific risks associated with flooding. Traditional homeowners insurance policies often do not cover flood damage, which can lead to significant financial losses for both homeowners and lenders in the event of a flood. Once a property is identified as being in a designated flood zone, lenders are obligated to ensure that adequate insurance coverage is in place to protect their financial interests. Flood insurance provides coverage for direct physical loss or damage to insured property caused by flooding, which includes water entering the home and causing damage. This requirement ensures that homes in high-risk areas have the necessary coverage to mitigate potential losses and to safeguard the investment of the lender. Other types of insurance, like earthquake or standard homeowners insurance, do not adequately address the specific risks posed by flooding, making flood insurance the appropriate and required coverage in this context. Comprehensive homeowners insurance, while broader in its coverage, still typically excludes flood damage unless supplemental flood insurance is purchased. Thus, flood insurance is the only type of coverage specifically designed to address the risks of flooding, fulfilling the requirements set by lenders.