A type of catastrophe insurance, a flood insurance policy is different than the basic hazard insurance coverage contained in a homeowners policy. Standard homeowners insurance covers interior water damage, due, say, to a burst pipe, or weather events like tornadoes and rainstorms. However, it generally doesn't cover destruction or damage caused by floodwaters. Property owners who live an area prone to this sort of natural disaster usually need to get special coverage.

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Flood insurance basically works just like other insurance products: The insured (the home- or property owner) pays an annual premium based on the property's flood risk and the deductible he or she chooses. If the property or its contents are damaged or destroyed by flooding caused by an external event (rain, snow, storms, collapsed or failed infrastructure), the homeowner receives cash for the amount of money required to repair the damage and/or rebuild the structure, up to the policy limit. Unlike a standard homeowners policy, flood insurance requires that a policyholder buy separate policies to cover a dwelling and its contents. A separate endorsement is needed on the homeowners policy to cover sewer backup if the backup was not caused by the rising floodwaters.