An Update on Flood Insurance

Posted in Home Insurance

June 21st, 2011

If you’ve been following the debates regarding flood insurance over the past couple of years then you know plenty has occurred. The National Flood Insurance Program (NFIP) ran its course on numerous occasions, resulting in expirations that left policyholders without coverage.

Finally, in Sept. 2010, the NFIP was extended for an entire year, which gave lawmakers an opportunity to review the program in its entirety and make decisions that will help it last in the long-term. Now that some time has passed, let’s look at how the program has progressed.

The Struggles of the National Flood Insurance Program

The National Flood Insurance Program, which is a component of the Federal Emergency Management Agency (FEMA), specializes in flood insurance, floodplain management and flood hazard mapping. The program was created to ensure ordinances are in place to reduce flood damage while setting flood insurance requirements for those living in areas that are considered at risk.

In recent years, the NFIP has run into issues with its floodplain maps and flood insurance standards. The program was criticized for maintaining floodplain maps that were simply too outdated and didn’t accurately reflect the level of risk assumed in specific areas. As a result, some people were paying too much for coverage and some were not paying enough.

In 2009, It was determined that FEMA flood insurance standards were proven unsatisfactory, especially in high-risk areas like Texas along the Bolivar Peninsula. In this area, FEMA required new homes near the beach to be 19 feet above sea level. However, those who went above and beyond these expectations had a smaller risk of beyond swept away in a hurricane.

Another major problem FEMA faces is the NFIP is in the red. In Aug. 2010, the program owed the Dept. of Treasury more than $18 billion and was unlikely to pay it back.

All of these issues left lawmakers feeling responsible for conducting a massive overhaul of the program. But like many issues in Congress, it was difficult for lawmakers to come to an agreement on what should happen with the program, which led to stalemates and the expiration of the NFIP on numerous occasions.

NFIP Timeline

Here is a timeline of the troubles the program experienced starting in 2009:

March 2009: The NFIP was set to expire on March 6, 2009 after having had an extension passed on Feb. 25 by the House of Representatives and an even bigger extension in the fall of 2008. Senate members had trouble renewing the program because they couldn’t agree on specific issues.

Sept. 2009: Lawmakers were still at odds with their ideas for the program. As a result, a temporary 31-day extension of the program was passed to avoid expiration on Sept. 30, 2009.

Oct. 2009: Still unable to create a long-term solution to the program, Congress created another extension, which was signed on Oct. 30, 2009 by President Barack Obama. This extension was to last until Dec. 18, 2009.

Dec. 2009: After allowing the program to lapse, the NFIP was extended on Dec. 30, 2009 through Feb. 28, 2009.

March 2010: On Feb. 28, Obama signed for yet another extension of the NFIP. This time, the extension would last one month until March 28.

April 2010: After the House passed an extension to the NFIP at the end of March, Senate, still at odds, failed to act. As a result, the program expired and was not voted for another extension until April 15 when the Senate came back in session after Easter break. This extension was to last until May 31.

July 2010: Between May 31 and July 1, the NFIP suffered its longest lapse after lawmakers allowed the program to expire. Finally, on July 2, Obama signed H.R. 5569 into law, which extended the program until Sept. 30, 2010.

Sept. 2010: In the biggest sigh of relief policyholders could breathe, lawmakers finally realized that the short-term extensions were not working and extended the program until Sept. 30, 2011.

While it seemed lawmakers could not make a decision for the NFIP, insurers began making up their minds about how they wanted to deal with the program and FEMA, which operates the program. State Farm left the flood insurance business in July 2010, dropping 800,000 of its policyholders, while other private insurers considered eliminating flood coverage from their rosters.

The Latest and Greatest Updates of the NFIP

The multiple expirations and general shaky foundation of the program made Americans feel that the program could never get it together. But alas, after the last extension, lawmakers began drafting legislation that could possibly set it on the right path.

In March and April 2011, lawmakers had lengthy talks related to extending the NFIP to 2016. But first, some issues need to be agreed upon. Some of the proposals for the final bill that is expected to be introduced no later than Sept. 30, 2011 are:

• Increased limits: Lawmakers have proposed that coverage limits be increased for both residential and commercial properties, which is something that hasn’t occurred since 1994.
• Premium increases: Premium increases have also been proposed for non-residential, non-primary residences. The increases could reach as much as 20 percent.
• Premium subsidies: There are subsidies available for properties built prior to 1974. The new bill could phase these out.
• Additional living coverage: The new bill could limit coverage for additional living expenses on residential properties to $1,000.

Also, the issue of whether to include wind coverage in flood insurance has been significant. In fact, the idea that covering wind damage could increase a homeowner’s flood insurance cost significantly is one of the primary reasons that lawmakers refused to agree on a long-term solution for so long.

Most recently, the FEMA chief announced that he wanted private insurance companies to play a larger role in the flood insurance industry. He wants limits adjusted upwards but hopes that private insurers can take on this burden.

With these issues and budget disagreements still on the horizon, it could take some time to agree on what’s best for the program. Hopefully, Congress will come to a decision before the program expires again in September.