Flood Insurance: The Other Part of the Story Not Being Covered by the Media and Others
An editorial written in the Washington Post titled “Reforms should tackle flood and moral hazard” and reprinted in the St. Petersburg Times (2/4/2014) attempts to make a case that the U.S. House of Representatives should not follow their colleagues in the U.S. Senate and repeal the dastardly Biggert-Waters 2012 “Flood Reform” act. No need to go into a lengthy accounting on what’s in this piece of legislation and what it’s doing to still recovering homeowners. Examples of their pending financial ruin are constantly in the press and ubiquitous across the Internet.
But unfortunately, very little has been written about the parts of the FEMA National Flood Insurance Program that should have been part of the dialog and disclosure had the opponents of Biggert-Waters looked under the hood of FEMA/NFIP. What should be reviewed and taken into consideration are the burdens homeowners are already bearing with the rules and regulations that apply pre-loss and post-loss when a homeowner falls into the FEMA/NFIP malaise.
To start off, this program is not a welfare handout. People have to pay real dollars for flood insurance. Those in higher probability or velocity flood zones pay more than those in areas less likely to flood. But as we are now finding out, the government blew it. A deficit of $24 billion is a significant miscalculation by the Washington overseers of FEMA/NFIP exposure.
For a community to be accepted in the NFIP program, they must agree to the rules and regulations or in this case, enforcement of mitigation rules that are costly pre-loss and post-loss with potentially devastating financial results to homeowners. As an example, if you want to build a new home on or near the water or in a flood zone, millionaire or not, you must build to the current elevation height established by FEMA. If not you, will not be given a building permit and in the case where someone gets caught with a lower elevation level than required, no Certificate of Occupancy will be given.
If a community gets caught not complying with and enforcing FEMA/NFIP regulations, they can be kicked out of the program, resulting in a loss of their certification. Imagine the effect on commerce if lenders won’t provide mortgages due to the lack of flood insurance. To give you a visual example of this mitigation enforcement, drive around the old neighborhoods near any flood prone area and notice the newer homes and their elevation heights. They are not built that way because they necessarily wanted to; they had to do that to comply with FEMA/NFIP height requirements.
The other older on-grade homes do not likely house millionaires but more likely hard working families or retired folks who relied on their government’s promise years ago to provide affordable and sound flood insurance. I suspect they also relied on their government to know what they were doing and be good stewards of the public business.
As to those millionaires who may be residing in the elevated house and paying for flood insurance because they have a mortgage, rest assured very little money will be paid to them in the event of a typical flood. Just read the flood policy and notice what is covered on the lower level of an elevated home--not much. Talk about illusionary insurance coverage, these elevated houses are classic cases of donor homes. And remember, there are all sorts of building requirements mandated by FEMA/NFIP that are enforced by the local building department such as 10 or more feet of construction height, break away walls and foundations poured around piles driven deep into the ground. This entire cost burden has been placed on the flood policyholder to meet flood mitigation requirements.
What about those older homes built on grade? What will happen to them in the event of a significant flood loss? Well, you can find that answer at your local building department.
This is where the real FEMA/NFIP enforcement issues are found. And make no mistake about it, this is a biggie. Since your community signed on to the FEMA/NFIP rules and regulations, homeowners are now subject to the 50% rule. Here’s how that rule works. If you have a flood or a flood and wind loss (think hurricane) and your home is damaged to 50% of its value, you cannot rebuild as is. You must now comply with current height requirements as established by FEMA/NFIP flood maps. Which means your home must be elevated (jacked up) or torn down and a new home built to the FEMA /NFIP requirements.
But you have flood insurance, and most homeowners assume it will cover any flood related loss, right? Yes, to some extent. But homeowner’s flood insurance is capped at $250,000 assuming you bought the maximum flood coverage. Now consider that the NFIP will pay you up to $30,000 for Law and Ordinance (the part requiring you to raise your home). This is NOT an increase in coverage but included within the $250,000 maximum.
Can you rebuild your home to current code height requirement for $250,000? Just look into the cost of elevating a home and you’ll get your answer.
In the interest of full disclosures, if wind contributes to your loss, you may if you have not rejected it in your homeowner’s policy have some Law & Ordinance in that policy. But remember, your wind policy will most likely have what is called an A.C.C. (Anti-current Causation Clause) and you can bet the adjusters from the flood and wind adjusting companies will argue amongst themselves (at your expense) about which came first, the wind or the flood. As a 30 year public adjuster, our firm has seen the issues mentioned above repeatedly play out with our clients and most recently during the Super Storm Sandy mess.
So I guess my purpose in going on a rant about the flood issues with Biggert-Waters is that the federal government, your elected officials, and others have already boxed you in with burdensome costly expenses that are already build into the system that helps them mitigate the cost of the flood peril. Now they want you to bail them out for their underwriting actuarial mistakes with this dastardly law called Biggert –Waters 2012 Flood Insurance Reform.
Call your U.S. representatives. Tell them to vote like their colleagues did in the Senate. Tell them you would support some type of flood reform, but not the kind of sledgehammer approach in the Biggert–Waters 2012. Take some time to do a real analysis and come up with some proposals and solutions than can be debated in an open democratic forum. Hopefully, we can get some real flood insurance in place that adequately covers the damage incurred in a disaster.
Finally, if you have a water loss in your home or business from frozen pipe breaks, while it may seem like a flood to you, report it as a water loss. Trust me, if the U. S. Congress can screw up legislation on a national scale with “flood reform,” just think about what your friendly insurance claim department might do with a misreported flood loss. Let us know what you think by commenting below.