The Flood Insurance Mystery

Flood Insurance is a mystery to most people. We live in Northwest RI; not near the coast. Should we consider buying flood Insurance around here? How about a summer home in Narragansett? Isn’t it part of my Homeowners Insurance anyway? Could the changes the politicians are flip flopping on affect us? There are no simple answers to all of these questions, and after additional legislative and procedural changes are set in place, there will likely be more questions. Perhaps the best way to demystify Flood Insurance is to give you a little history.

After the 1954, 1955 and 1958 Hurricanes destroyed much of Rhode Island’s southern coast, and much of the whole eastern United States coastline, politicians began pushing insurance companies to expand fire insurance policies to cover losses caused by windstorms, floods, snow and ice, and a host of other “perils”. Prior to then, homeowners bought individual policies for those perils or simply were not insured for them.  In areas where the chance of a loss was slim or irregular, insurance companies could establish reasonable rates to add those coverages to a policy. In other areas, losses from such exposures were close to an annual event; no insurance company could charge sufficient premiums to pay those losses year after year.

Recognizing that there was a public need, in 1968 Congress enacted the National Flood Insurance Program (NFIP) as an extension of FEMA. The theory was good. They set out to help communities recover quickly after a flooding event and to establish a good flood plain management program. Initially to participate, a community had to agree to enact building codes designed to minimize flood damage in areas with a history of flooding. The regulations mandated a community’s building codes in flood prone areas to incorporate designs that prevented or minimized flooding damage when a flood occurred. In return, the NFIP made Flood Insurance available to all property owners in that community—regardless of the risk.  The program evolved through the establishment of flood insurance rate maps (FIRM) to identify the risky areas and buildings that were exposed in those areas. With that came an effort to establish a rate structure that would encourage participation so that all buildings in a flood zone would be covered.

Federal Guidelines were established to differentiate between water damage covered by the NFIP and your typical homeowners’ policy. Any water that enters your home from outside is not covered by your homeowner insurance policy. (Be it seeping in through your foundation or cellar floor due to water table, or through cellar windows from heavy rains, or an overflowing river) Flood insurance would apply to those conditions as long as two or more abutting properties are affected. As an example, during the flooding our region experienced in 2010, many homes were affected by the high water table and not flooding rivers. Those victims were eligible for FEMA disaster relief. Many homes did have up to $5000 or even $10,000 coverage afforded them through an endorsement added to their homeowners policies called Sump pump coverage. It responded if they had a sump pump that failed or simply could not keep up with the demand placed on it.

Historically some people have declined to buy flood insurance; instead relying on FEMA to provide emergency funding after a losses we saw in 2010. Politically FEMA could not decline to help a community after a disaster. For years FEMA unintentionally served as a funding source to revitalize many communities year after year…at every tax payers’ expense. Regulations were implemented which required repairs made to bring the respective building up to flood control codes and required the purchase of Flood Insurance. Failure to comply with either meant no further eligibility for FEMA disaster relief. That has helped stop some of the program leaks.

The availability of flood insurance, gave financial institutions security for their investments. They were now willing to write a mortgage in these flood zones knowing that if a flood did damage a building, the government would pay to restore it. Losses kept pouring in; the program was losing money, our tax dollars were funding what amounted to coastal renewal projects. Mitigation regulations became stricter and technology advances enhanced the accuracy of flood mapping. In the late 1990’s the NFIP was reporting to Congress that they were close to having a program that was self sufficient. They predicted that soon all US tax payers would be free of the burden of supporting the NFIP.

Then came the summer of 2004; Hurricanes Rita, Wilma and Katrina destroyed the Gulf Coast proving predictions of financial stability false. As if more evidence weren’t needed, Super Storm Sandy’s wrath on the densely populated east coast required BILLIONS more federal support for the NFIP. It proved rates were far from actuarially matching the flood loss potential.

In a knee jerk reaction to “Sandy”, on July 6, 2012 Congress passed the Biggert Waters Flood Reform Act.  It focused on six key reforms:

  • All new flood policies will only be written using actuarial risk based rates.
  • Policies covering primary homes with subsidized rates will see those subsidies phased out.
  • Secondary homes, non-residential buildings, severe repetitive loss buildings and severely flood damaged buildings will see premium subsidies phased out
  • Policies that were written between July 6, 2012 and October 1, 2013 are to be re-written with actuarial risk based rates
  • Future NFIP rate increases can be raised up to 20% annually.
  • A reserve fund was to be established using a 5% surcharge on rates charged.

As a result of this law, purchasing a home in most of our coastal communities subjected you to thousands more in flood insurance premiums than the current owner was likely paying. Family summer homes were seeing premium increases of 25% per year until they could prove through an Elevation Certificate (obtained through an engineering site survey) that the rate they were being charged was an actuarial risk based rate.

These changes were cost prohibitive. It was projected to further devastate Rhode Island’s economy. We weren’t alone. Coastal and flood prone communities throughout the country were making waves. Congress heard our legislators and passed new legislation that basically gave them a life boat hide in. It directed NFIP to put on hold the rate increases and modify the implementation plan the 2012 law mandated. Some changes will be coming very soon and some will basically be put on the back burner for years to come. It basically delayed the inevitable and all of our taxes will continue to support it.