Flooding The Market?

Millions of American property owners get flood insurance from the federal government, often benefiting from substantial discounts. However, over the past several years, the government paid out huge amounts of money after floods, and the flood insurance program ran out of money.

In 2012, Congress tried to fix that by passing a law - the Biggert-Waters Flood Insurance Reform Act - which instructed FEMA to charge higher insurance rates not unlike those private companies charged. The intended solution was to help make the government's flood insurance program financially solvent by bringing rates in line with true flooding risks.

The law also resulted in the redrawing of the Flood Insurance Rate Maps (FIRMs) in what was told was an effort to reflect the current elevated risks. The mapping zone changes have been relatively substantial, essentially increasing and/or adding areas that previously didn’t require flood insurance. The changes also left some properties uninsurable. Many discounts and subsidies policyholders received in the past - including those for second homes – were eliminated or will begin phasing out over the next several years.

In late 2013, the new rates began, blindsiding more than a million policy holders as the federal subsidies phased out and the premium sky rocketing commenced - forcing premiums that were once around $500/year into the $5,000, $10,000 and even $20,000 per year range and higher.

One new homeowner, George McLaughlin, purchased a future retirement home in Port Richey in 2012 and paid a $3,300 premium for his first year of coverage.  When he received his new bill for $24,300 both he and his insurance agent assumed it was a clerical error.  It was not.  Even his bank was unaware of the pending increase when they wrote the loan.  RealtyTrac says this was "certainly a big oversight for that bank given the additional risk of default that comes with such a dramatic increase in the cost of flood insurance."

McLaughlin, who purchased the Florida property while still employed and owning a home in Maryland is now carrying two mortgages and facing the insurance bill due November 2 which he still has not paid.  Thus he is technically in default on the Florida mortgage.  The bank has given him 40 days (which would have taken him into early December) to provide proof of coverage and have told him that forced placed insurance will cost as much as $60,000 (read more at Mortgage News Daily).

The greatest impact of the Biggert-Waters Act will be felt by subsidized policy holders and may mean some residents are stuck in homes they can't pay rates for, or sell. According to Michelle Burnett, Rhode Island state coordinator for the National Flood Insurance Program, about 43 percent, or 6,755, of the federal flood policies are subsidized. That number, said Burnett, is nearly double earlier federal projections because Rhode Island properties tend to be older — and older properties are more deeply subsidized. Their risk outweighs their premiums because they were built before the first flood maps were drafted in 1978 and before standards such as building elevation went into effect.

Of those subsidized properties, Burnett estimates that about 2,100 will be affected by the new law because the rest are primary residences. About 1,400 are secondary residences and about 700 are commercial properties. Susan Arnold, CEO and general counsel of the Rhode Island Association of Realtors, knows of premiums of $50,000 and $60,000 a year.

Revised FIRM maps for all counties in Rhode Island are now in effect, with the exception of Bristol County. Bristol County maps will become effective in May 2014.  Northeast Engineers & Consultants, Inc. in Middletown has developed a handy tool called the FIRM Comparison Map* that makes it easy to quickly see how the flood maps have changed.

Property owners and prospective purchasers can only benefit from a clear understanding of the new (and currently evolving) flood laws. If you have questions about your property, contact your insurance agent and a trusted Realtor to assist in navigating the vast sea of flood insurance requirements.