Mohawk Valley Flooding and the Future of Flood Insurance

Syracuse’s Post-Standard is reporting today that “[l]ess than one percent of the homes in Oneida, Montgomery and Niagara counties – among those hardest hit by flooding that began June 28 – have flood insurance, according to data from FEMA.”  This means they are very likely to face denials under their homeowner insurance policies, because these standard policies exclude flood damage.

Why is flooding an excluded “peril”?  That gets to why is there a National Flood Insurance Program (NFIP), starting with the National Flood Insurance Act of 1968 (NFIA).  As the article describes quite well, “Flooding damage is usually so widespread and so devastating that a private company would have to charge unaffordable rates to make up for the risk. And even then, a flood could wipe a company out.” Because this is such an “uninsurable” (ie, both likely and catastrophic) risk, the NFIA establishes a federal program that aggregates the risk and subsidizes it through a public fund paid in part by premiums and in part by Congressional appropriations.

But premiums are on the rise, with sharp increases in flood risk over the past decade and as FEMA revises its flood maps (ie, Flood Insurance Rate Maps or FIRMs) on a community-by-community basis (remapping is pending for Long Island), in tandem with recent amendments to the NFIA under the Biggert-Waters Reform Act of 2012 that are moving the program into more of an actuarial, market-based direction.

The act, passed only three and a half months before Superstorm Sandy, eliminates some of the “grandfathering” policies that reduced premiums (click here for former guidance) and creates what is sometimes called a “subsidy phase out.”  Local building requirements may also apply, affecting the cost of rebuilding and premiums afterward.

For example, when we see a home in some communities with more than 50% storm damage (relative to its pre-storm value as the denominator), future premiums can go through the roof if “hazard mitigation” isn’t incorporated into the rebuilding.

This means that the homeowner could face annual premiums of over $10,000 for basic flood coverage, unless the home is elevated at a cost of $100,000 or more.   The standard policy only insures the structure for up to $250,000.  And, as the claims-handling process has demonstrated, many Sandy victims are forced into the position of having to fight to even get a fair payment on the coverage they bought.  One victim commented at a Superstorm Sandy Town Hall in May to the effect of, “What good is requiring flood insurance if it doesn’t pay when you have a flood.”  Only $30,000 of that elevation cost is covered under a special “increased cost of compliance” provision of the flood policy – which is otherwise meant to “indemnify” the homeowner to build back to the home’s pre-storm condition.  We are hopeful that the NY Rising program and Hazard Mitigation Grant Program will be effective in defraying some prospective rebuilding costs.

More on Biggert-Waters in upcoming posts.  Click here for a helpful video overview.

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