New Law Raises Cost of Flood Insurance

By Richard A. McGrath, CIC, LIA

Homeowners in areas prone to flooding could be required to pay as much as $12,000 a year for flood insurance as a result of the Biggert-Waters Flood Insurance Reform Act (BW-12).

The new law means that taxpayers will no longer be subsidizing flood insurance for beachfront homes. However, taxpayers with homes in flood plains may need to pay large sums of money to raise their homes at least 15 feet off the ground.  Some may not be able to afford the new insurance rates, but if they try to sell their home, they will find it difficult to find a buyer, given the cost of flood insurance.

The new law updates the National Flood Insurance Program (NFIP), which insures 5.6 million Americans.  BW-12 was approved by Congress last year, but much of it took effect in October 2013.

Congress created the NFIP in 1968 because some homeowners were being financially devastated by flooding, a service not typically covered by homeowner’s insurance.  The NFIP required communities to incorporate minimum standards for construction to reduce future risk of damage from flooding, but existing buildings were allowed to remain in place and insurance for them was subsidized by the federal government.

BW-12 updates the NFIP for the first time since 2008 and extends the program for five years.  NFIP has been extended 17 times, typically for short periods and without significant updates.  It sometimes has expired, temporarily leaving policyholders without protection.

As a result of the new law, flood maps are being updated and federal insurance subsidies are being phased out, with the goals of:

  • Raising rates to reflect true flood risk
  • Making the program more financially stable
  • Changing how updates to the Flood Insurance Rate Map (FIRM) impact policyholders

After Hurricane Katrina and Supertorm Sandy, the NFIP owes the U.S. Treasury $24 billion.  Charging homeowners based on the cost of providing them coverage is expected to help the program reduce its debt.

Changes Under Biggert-Waters

BW-12 will affect all properties that are located in a Special Flood Hazard Area (SFHA).  The Federal Emergency Management Agency (FEMA) has designated SFHAs areas where base flood elevation is at a level at which FEMA considers the annual chance of flooding to be 1% or higher.

Under the new law, communities across the country are adopting new Flood Insurance Rate Maps (FIRMs).  Compliance is voluntary, but residents of communities that fail to adopt the FIRMs will not be eligible for flood insurance coverage from the NFIP.

As new maps are adopted, insurance rates that have been grandfathered in each community will be phased out, with rates increasing by 20% a year for five years.

Owners of primary residences located in a SFHA will continue to receive subsidized rates until their property is sold, their policy lapses, a new policy is purchased or they experience severe, repeated flood losses.

In addition, insurance premiums for each of the following will increase by 25% a year, beginning this year, and continuing until rates reflect true risk:

  • Vacation homes and second homes in a SFHA
  • Property that has experienced severe or repeated flooding
  • Business and non-residential property located in a SFHA

According to FEMA, it will take two to five years of rate increases before some property owners are paying rates that accurately reflect the risk of insuring their property.

As new maps are being adopted, many homes and buildings are being marked as being located in the high-risk flood zone for the first time.  If owners of the homes have mortgages, they will be required to buy flood insurance.

In some cases, homeowners that previously were not considered to be in a SFHA will need to raise their houses to conform to requirements of the new law.  The law requires that homes be raised at least 15 feet, up from a previous requirement of nine feet, so some homeowners who have already raised their homes will have to raise them another six feet.

Sharing Risk

At 584 pages, BW-12 is a complex law that includes many additional changes.

By enabling FEMA to purchase reinsurance, BW-12 passes along some of the risk of insuring against flooding to the private sector.  It enables owners of multifamily homes to obtain flood insurance through NFIP for the first time, and it requires lenders to accept coverage not backed by NFIP, as long as the coverage meets NFIP requirements.

An amendment to BW-12, initially known as the Consumer Option for an Alternative System to Allocate Losses (COASTAL), should help differentiate claims caused by wind damage from claims caused by water damage, so they can be settled quicker and more accurately.

Other changes are yet to come.  BW-12 requires the U.S. Government Accountability Office (GAO) to study how the NFIP should respond to coverage for claims relating to business interruption and living expenses.  It also requires the Federal Insurance Office to study insurance issues relating to natural disasters and to report to Congress.  In addition, the law includes provisions for the study of privatizing the flood insurance business.

According to FEMA, “The changes will mean premium rate increases for some—but not all—policyholders over time.  Homeowners and business owners are encouraged to learn their flood risk and talk to their insurance agent to determine if their policy will be affected by BW-12.”

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at

This article is written for informational purposes only and should not be construed as providing legal advice.