The Latest on Flood Insurance Regulation and Premiums: The Homeowner Flood Insurance Affordability Act of 2013”

Norton Hammersley Real Estate Law

Hurricane Betsy, or “Billion-dollar Betsy”, struck New Orleans in 1965, destroying innumerable homes.  Before Betsy hit, flood insurance was extremely hard to come by.  After Betsy hit, it became nearly impossible to get flood insurance, as many carriers stopped providing flood coverage and issuing flood insurance policies.  Property owners who experienced a flood often found themselves devastated and unable to rebuild.

Congress created the National Flood Insurance Program (“NFIP”) in 1968 in response to Hurricane Betsy.  Today, the Federal Emergency Management Association (“FEMA”) administers NFIP.  The objective of the NFIP was to fill the gap caused by the private insurance market’s failure to create an adequate private flood insurance market, and to protect consumers in coastal and other flood-prone areas.  The NFIP enabled property owners in participating communities to purchase flood insurance if the community adopted floodplain management ordinances or laws, and minimum standards for new construction.  However, owners of existing homes and businesses did not have to rebuild to the new codes/standards, and many received subsidized rates that did not reflect true flood risk.  Some nineteen percent (19%) of NFIP policy-holders still pay these subsidized rates.

Though it was supposed to be self-sustaining, the NFIP now finds itself $24 BILLION in debt.  This is a direct result of many NFIP policy-holders not paying rates that reflect true flood risk, and the successive occurrence of a large number of natural disasters that resulted in significant flood damage (e.g., Hurricane Katrina, Hurricane Rita, Hurricane Wilma, and closer to home, Hurricane Charley).

As a result of the NFIP’s massive debt, Congress passed the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012 (“Biggert-Waters”).  President Obama signed Biggert-Waters into law on July 6, 2012.  Importantly, as an initial matter, Biggert-Waters extended the NFIP for five (5) years until September 30, 2017.

The key provisions of Biggert-Waters as initially implemented were intended to enable NFIP to stabilize and remain sustainable by changing its premium structure to reflect true risks and the real costs of flooding, and to change how Flood Insurance Rate Map (“FIRM”) updates impact policy-holders.  A FIRM is relied upon to determine the risk of flooding in a particular area, and is the source of law, figuratively speaking, that determines particular premiums.

            Unfortunately, the result of the initial implementation of Biggert-Waters resulted in negative consequences, including, but not limited to the following[i]:

  • Massive premium increases resulting in insurance being unaffordable for many;
  • House sales in affected areas lagging due to high premiums;
  • National Association of Realtors data shows that as of January of 2014, some four (4) months after the implementation of most of the premium rate increase provisions of Biggert-Waters, more than 40,000 home sales have been delayed or cancelled due to premium rate increases.
  • House sales seeing depressed values due to high premiums;
  • Owners have been walking away, leaving lenders with un-saleable properties.

            Because of the dramatic increase in many flood insurance premiums caused by the passage of Biggert-Waters, the law became one of the hottest topics in the real estate and insurance industries, and also one of most talked-about and written-about issues in recent Washington politics.  In response to the unintended negative consequences of Biggert-Waters, Congress recently passed the Homeowner Flood Insurance Affordability Act of 2013 (“HFIAA”).  President Obama signed the legislation into law on March 21, 2014.  Though the new law delays, repeals, and modifies many of the unworkable provisions of Biggert-Waters, Biggert-Waters remains intact.  The current state of the law is that there are significant changes to the pre-Biggert-Waters flood insurance regulations.

Before discussing the HFIAA and Biggert-Waters in detail, it is important to understand who will be impacted by the flood insurance premium structure changes under the new law(s).

In general, as will be discussed in greater detail below, the properties that will be most affected by flood insurance premium increases will be properties located within a Special Flood Hazard Area (“SFHA”), or high-risk area, that were constructed before a community adopted its first FIRM, and that have not been elevated.  Properties built before the initial FIRM was adopted in a community, and that have not been significantly improved since that date are known as “pre-FIRM” properties.  As alluded to above, many of these properties do not meet current standards of construction and elevation, and have been receiving subsidized premium rates that do not reflect actual flood risk.

81% of NFIP policy-holders already pay non-subsidized rates, and thus will not be impacted by any rate increases.  These policy-holders already pay full-risk, or actuarial rates.  19% of NFIP policy-holders will be impacted, or not impacted, as delineated hereinafter.  For informational purposes, the breakdown by type of these 19% of the policy-holders is as follows: 10%:            Pre-FIRM primary residences; 5%:     Pre-FIRM non-primary residences, business properties, and Severe Repetitive Loss properties (“SRL properties”) (SRL means the property has had four or more claims payments of over $5,000.00, or two claims that exceed the market value of the property); 4%: Other properties, including pre-FIRM condos and non-condo multifamily properties.

Not all affected policy-holders will see an increase in premium rates.  Obtaining and reviewing an “elevation certificate” is the only way to know a building’s risk, and of determining what its premium rates will be.  Of the many factors that determine the full risk rate of a building, the most important is the elevation of the building in relation to the base flood elevation, or “BFE”. A community’s FIRM indicates the area of the community that has a 1% or greater annual chance of flooding. That area is called the SFHA.  Put another way, the BFE is the elevation where there is a 1% or greater annual chance of flooding.  Generally, the higher the elevation above the BFE, the lower the flood risk. This information is shown on an elevation certificate.  To determine the premium rate for a property in high-risk zone, it is necessary to obtain an elevation certificate.  There is no guarantee that the premium rate will increase just because it is an affected policy.  If the full-risk rates calculated using the elevation certificate are lower than the pre-FIRM subsidized premium rate, the policy will be adjusted to show the lower rate.  This should be negotiated with the insurance agent obtaining the policy for the policy-holder.

Biggert-Waters Flood Insurance Reform and Modernization Act of 2012: 

Before the Homeowner Flood Insurance Affordability Act of 2013

Before reading the section outlining the current state of the law, the author draws the reader’s attention to the types of properties and policies as they were originally affected by the flood insurance premium changes under Biggert-Waters as initially implemented.  The reader will benefit from reviewing the tables and information presented immediately below, because it will provide the framework necessary to understand the current state of the law.  Again, the passage and implementation of the HFIAA only delays, repeals, and modifies many of the unworkable provisions of Biggert-Waters as initially implemented.  As stated above, except as modified by HFIAA, Biggert-Waters remains intact.  Here is Biggert [1]

 

Pre-FIRM Properties with New Policies:

Pre-FIRM Properties With New Policies

Subsidized Premium Rates are Eliminated (as delineated herein)

 Recently purchased/transferred buildings in high-risk   areas (marked as A or V, and sometimes D – “undetermined-risk” – zones on   FIRMs)  Policies for newly purchased pre-FIRM buildings are issued   at full-risk premium rates.  Policies   that were issued at subsidized premium rates for pre-FIRM buildings purchased   on or after 07/06/2012 renew at full-risk rates (as of 10/01/2013).
 Policies issued for the first time on buildings in   high-risk areas  New policies are issued at full-risk rates. Pre-FIRM   subsidized policies first in effect on or after 07/06/2012 renew at full risk   premium rates starting 10/01/2013.
 Policies reissued after a lapse in coverage on pre-FIRM   buildings in high-risk areas  Policies are reinstated at full-risk premium rates.  Lapsed policies reinstated on or after   10/04/2012 and before 10/01/2013 will renew at full-risk premium rates.

Pre-FIRM Properties Paying Subsidized Premium Rates:

Pre-FIRM Properties Paying Subsidized Premium Rates

Subsidized Premium Rates are Moving to Full-Risk Premium   Rates (as delineated herein)

 Non-primary residences (secondary or vacation homesor rental properties) in high-risk areas  (For policies in effect before 07/06/2012)25% annual increases at policy renewals until premium   rates reach full-risk premium rates.    If the pre-FIRM property is sold, the new owner pays full-risk premium   rates.  Premium rate increases began   01/01/2013.
 Non-residential/business buildings in high-risk areas  (For policies in effect before 07/06/2012)25% annual increases at policy renewals until premium   rates reach full-risk premium rates.    If the pre-FIRM property is sold, the new owner pays full-risk premium   rates.
 Previously flooded residences in high-risk areas (SRL   properties)(Note: SRL means four or more claims payments of over   $5,000.00 in total exceeding $20,000, or two claims that  in total exceed the market value of the   property.)  (For policies in effect before 07/06/2012)25% annual increases at policy renewals for severely or   repetitively flooded properties of one to four residences until premium rates   reach full-risk premium rates.  If the   pre-FIRM property is sold, the new owner pays full-risk premium rates.  Again, pre-FIRM condos and non-condo   multifamily properties are not yet subject to premium rate increases under   Biggert-Waters.

Other Types of Property:

 Other Types of Property

Subsidized Premium Rates Can Continue, or Do Not Apply (as delineated herein)

 Pre-FIRM primary residences in high-risk areas  Subsidized rates continue for policies in effect before   07/06/2012 unless or until:
  • Property        is substantially improved;
  • Property        is sold or transferred;
  • Policy        is allowed to lapse;
  • Property        of one to four residences incurs severe, repetitive losses or receives        insurance payments that exceed the property’s value.

 Post-FIRM residences in high-risk areas (Post-FIRM   buildings are buildings that were built after the initial FIRM was adopted in   the particular community.) They are not affected; they are already paying full-risk   insurance premium rates. Residences in moderate to low-risk areas (marked as B, C,   or X zones on flood maps) They are not affected; properties in these areas do not   pay subsidized insurance premium rates.

“Grandfathering” under Biggert-Waters:   

 “Grandfathering” under Biggert-Waters as initially   implemented:
      • “Grandfathering”         was to be phased-out
        • Prior  to Biggert-Waters as initially implemented, the NFIP “Grandfather”          procedure provided that owners of buildings built post-FIRM, in compliance with applicable standards, could use risk data from a  previous FIRM if the more recent FIRM indicated a greater risk of  flooding.  Of course, the  policy-holder had to have maintained continuous coverage through a/the period(s) of (a) FIRM revisions.           Such properties were in effect, administratively “Grandfathered”.
        • Biggert-Waters          as initially implemented required the use of updated FIRM’s for  calculating premium rates.  The  relevant provision provided for a five-year phase-in of the new premium rates, at 20% per year until full-risk levels are reached,          slated to begin sometime in late 2014.    Implementation details were not certain due to the passage of the Consolidated Appropriations Act of 2014 (Omnibus).
        • The    Consolidated Appropriations Act of 2014 (Omnibus)
          • The Omnibus effectively postponed the implementation of Section 207 of        Biggert-Waters, the provision outlining the phase-out of  “Grandfathering”, until at least the end of fiscal year 2014 (09/30/2014).  The Omnibus delayed FEMA’s ability to expend funds appropriated under Biggert-Waters on Section  207.  The Omnibus did not amend or change Section 207, or amend or delay any other provision of  Biggert-Waters as initially implemented.

The State of Flood Insurance Regulation After The Homeowner Flood Insurance Affordability Act of 2013

The HFIAA eliminated the Biggert-Waters premium flood insurance rate increases to full insurance premium risk rates for properties not insured by the NFIP as of July 6, 2012, properties purchased after July 6, 2012, and policies under the NFIP that have lapsed in coverage, unless the lapse in coverage was a result of the property no longer being required to be insured.  Also eliminated is the provision of Biggert-Waters that requires policies for newly purchased pre-Firm buildings to be issued at full-risk premium rates.  Instead, the purchaser of a property that, as of the date of purchase, is covered by a NFIP policy may assume such policy at the existing premium rate for the reminder of the term.  Such rates shall continue with respect to such property until the implementation of the new increase provisions of Biggert-Waters, as amended by the HFIAA.

The rate increase provisions of Biggert-Waters, outlined in detail in the tables above have been revised significantly by the implementation of the HFIAA.  Essentially, the HFIAA ensures that no class of properties can see an average annual increase in flood insurance premiums higher than fifteen percent (15%), and with certain limited exceptions, no particular property/policy can see its flood insurance premium increase by more than eighteen percent (18%) per year.  Every property/policy that is subject to premium rate increases must see an annual rate increase of at least 5% until full premium risk rates are reached.

The most important exception to the general 18% rule is that in the case of the following types of properties, the flood insurance premiums will increase twenty five percent (25%) annually until full risk premium rates are reached: 1) Non-primary residence residential properties; 2) any severe repetitive loss property; 3) any property subject to flood claims that in total exceed the fair market value of the property; 4) any business property; and 5) any property that since July 6, 2012 has sustained flood damage in excess of fifty percent (50%) of the fair market value of the property, or has been improved to the degree of more than thirty percent (30%) of the fair market value of the property.

The HFIAA repeals the provision of Biggert-Waters phasing out “grandfathering” post-FIRM buildings.  The HFIAA allows “grandfathering” to continue, subject to the rate increases applicable to other properties, and as described herein.

A new surcharge is included in the HFIAA and will be added to all policies to offset the continuation of subsidized rates, in furtherance of the Biggert-Waters goal of achieving financial stability for the NFIP.  The new surcharge is in addition to the already existing surcharge due from each NFIP policy-holder for the cost of local compliance coverage for severe repetitive loss, or substantially damaged properties.  The new surcharge will be $25.00, except in the case of non-residential property and non-primary residence residential property, for which the surcharge will be $250.00.

In addition, the HFIAA requires the NFIP to refund, to policy holders, amounts paid for flood insurance premiums in excess of the rates required under the HFIAA.  Any such refunds will not be paid until FEMA, in conjunction with the WYO, a cooperative of private insurance companies and the Federal Insurance Administration, establishes guidelines and rate tables to determine the new rates.  This is mandated by the HFIAA to happen no later than eight months after the implementation of the HFIAA.

The HFIAA also contains many new provisions and features related to the future development of the NFIP, including, but not limited to provisions outlining the successful completion of an Affordability Study mandated by Biggert-Waters for future premium structures.

As this section delineates, though the HFIAA does away with many of the un-workable provisions Biggert-Waters, it still provides for significant changes to the pre-Biggert-Waters flood insurance regulations.  For information on how the new law will affect your premium, your ability to sell your property, or your ability to get the property you want or need, please visit www.nhlslaw.com for a complete and detailed article by Eric R. Hoonhout, Esq.


[1] FEMA materials derived from and found at www.fema.gov have been relied upon greatly, and in some part, have been largely copied, in this section and in other parts of this article.

 

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Norton Hammersley