Congress Reverses Course of Flood Insurance

By Richard A. McGrath, CIC, LIA

Congress took quick action in March to pass the Homeowner Flood Insurance Affordability Act of 2014, blunting the impact of the two main sections of the Biggert-Waters Flood Insurance Reform Act (BW-12) that caused an alarming increase to flood premiums.

The new law directly affects the 5.6 million Americans who purchase flood insurance through the National Flood Insurance Program (NFIP), but it indirectly affects all taxpayers who subsidize the program. NFIP was created by the federal government in 1968 to provide property owners with coverage for flooding, a peril not covered by homeowner’s insurance.

As a result of losses from Hurricane Katrina and Superstorm Sandy, NFIP owes the U.S. Treasury $24 billion, in spite of taxpayer subsidies. BW-12 was passed to enable flood insurance premiums to increase to market rates to prevent future losses.

Now, instead of increasing in some cases by 1,000 percent or even 1,500 percent, premium increases will be limited to 18 percent a year for “grandfathered” property that was originally built to code, but later found to be at risk for flooding. Premium increases will be capped at 25 percent a year for owners of businesses and second homes. In addition, rates will increase automatically by 25 percent a year for property owners who have had repeated floods or whose second home is in a flood zone until premiums reach a level that reflects their real risk of flooding.

The new law also charges the Federal Emergency Management Agency (FEMA) with developing a plan to keep premiums from rising too sharply, and it enables those who sell their home to pass on their subsidized rates to the new homeowner.

Subsidizing Beachfront Property

Critics of the new law point out that taxpayers will continue to subsidize wealthy owners of beachfront property. Taxpayer-subsidized flood insurance has, in fact, created an incentive for property owners to build in flood-prone areas, with the cost of replacement borne by the federal government at taxpayer expense.

According to a Congressional report, if Hurricane Andrew took the same path along the Florida coast today as it took in 1992, the cost to pay for losses would be $55 billion – more than twice the $25 billion it cost back then. Erosion is another expense, as models predict that one in four homes within 500 feet of the U.S. coastline will be destroyed by erosion over the next 60 years.

On the other hand, homeowners who are not wealthy would also be affected if the law were not changed. In some cases, they would no longer have been able to afford to live in their homes, but would also find it difficult to sell, given the cost of flood insurance. The new law allows them to keep subsidized rates, but with premiums that are significantly higher than in the past.

In addition, those who sell their property can pass on their subsidized flood insurance to the new property owner, although the new owner will have to purchase new insurance once the term of the existing insurance ends.

Before passage of the new law, BW-12 was pushing premiums in some cases to a level where they were higher than mortgage payments. Forbes cited a Greenwich, Conn., family that had its premiums rise from $458 to $5,500, while premiums for the second home of a Rhode Island resident jumped from $5,000 to $66,000 a year.

In some cases, owners of property that had never been flooded were seeing large premium increases.

Not a Total Overhaul

The new law doesn’t completely change BW-12. Some aspects of the law, such as the updating of flood maps, will remain. Property owners will be eligible to purchase flood insurance through NFIP only if the community where they live adopts a new Flood Insurance Rate Map (FIRM).

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

The new law also makes a variety of additional changes. For example, it requires the creation of a new flood insurance policy with a deductible that can be as high as $10,000. As with health insurance, setting a high deductible will reduce premiums, but the insured will pay more out of pocket when a claim is filed.

It also creates a flood insurance advocate “to advocate for the fair treatment of policy holders under the National Flood Insurance Program and property owners in the mapping of flood hazards, the identification of risks from flood, and the implementation of measures to minimize the risk of flood.”

The law gives FEMA eight months to develop rate tables and “final guidance” for implementing the new law. Property owners can contact their independent agents to find out how they will be affected by the new law and to purchase flood insurance.

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.