Friday, July 13, 2012

Changes in the Flood Insurance Laws

Last Friday President Obama signed H.R. 4348, extending the rewritten National Flood Insurance Program (NFIP) for five years to 2017. Since 2008, the flood insurance program has been extended for a few months 18 times and allowed to lapse twice, sometimes forcing homebuyers in flood zones to postpone a closing.
Failure to renew the program would have been another blow to the fragile housing market because potential homeowners in flood-susceptible areas would be unable to close on mortgages or refinance loans. A two-month lapse in the program in 2010 resulted in some 1,400 home sales a day being cancelled.

The new version of the program attempts to put the program on better financial footing by giving the government greater flexibility to raise rates. It also ends federal coverage for some properties, including vacation homes. It further streamlines FEMA efforts to raise or move homes that are sources of repetitive claims to the insurance fund. And it requires a lender to end flood insurance it “force placed” on a homeowner and issue a refund.
Congress created the flood insurance program in 1968 because very few private insurers cover flood damage, leaving the government to cover the costs of disasters. Many of those covered by the program live in flood-prone areas where flood insurance is mandatory for those with mortgages from federally regulated lenders.

According to the Florida Division of Emergency Management, Florida had over 2 million flood insurance policies as of Sept. 23, 2011, or roughly 37 percent all NFIP policies, and 97 percent of Florida communities participate in the program.

The new part of the bill finally deals with subsidies for certain properties (second home, business, severe repetitive loss or substantially improved/damaged) built before 1975. These properties will be charged full actuarial rates for flood insurance, but the increase will be phased in over four years at 25 percent per year. These are the homes that get whacked every year, and your tax dollars continually allow owners to rebuild, only to get flooded again.  Finally this “loophole” is being plugged.

It offers some new regulations (of course) insurers can use following a major storm to determine if property damage should be attributed to rising water (NFIP coverage) or the effects of wind (private coverage).

It eliminates subsidies for property not currently insured by NFIP. This includes property that had flood insurance in the past but allowed it to lapse. And it allows any of its flood insurance premiums to increase by 20 percent annually; it used to be the annual cap was 10 percent. But to make the increase easier to swallow, it allows property owners to pay for flood insurance in installments.

Accuracy of flood plain maps will also be refined. In the past, each time the maps were redrawn, homes along certain flood plains either now needed or were exempted from flood insurance.  It’s appropriate that new accurate maps are created. A technical council of experts will study an expansion of the flood insurance program to cover other natural disasters beyond flooding. That could lead to disaster insurance that includes other events, such as hurricanes and earthquakes.

Dane Hahn is a real estate professional practicing in Florida and New Hampshire.  You can reach him at or by phone at 941-681-0312.  See him on the web at

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