Flood insurance changes cause worries on coast

First published in Landings, July, 2014

We live in a world of insurance: car insurance, health insurance, homeowner’s insurance. It’s a common practice to protect ourselves in case of disaster. For those who live and work on the coast of Maine, one type of insurance almost surpasses all the others in importance: flood insurance.

The federal government recognized back in the 1960s that businesses and homeowners along the nation’s extensive coasts could not afford to pay the full cost to insure their properties against the damages caused by floods. In fact, in some states no private insurance was available at all for coastal properties. So in 1968 Congress passed the National Flood Insurance Act to provide flood insurance to floodprone property owners. The Act created the National Flood Insurance Program (NFIP), currently housed within the Federal Emergency Management Agency (FEMA).

“The NFIP was born out of the desire to reduce the cost of disaster assistance from flooding events,” explained Sue Baker, NFIP state coordinator within the Maine Department of Agriculture, Conservation and Forestry. “Communities opt to participate in the NFIP by adopting a land use ordinance that contains standards for building and improving buildings and real property in mapped floodplains. In exchange for the community adopting and enforcing standards in these areas, the government makes federally backed flood insurance available anywhere within that community.”

The NFIP contracts with private insurance companies to underwrite coastal properties’ insurance policies. “Right now we have about 9,300 policies in the state [insured under the NFIP]. That’s not many for such a huge coastline,” Baker added.

The federal law requires that any building purchased with a federally-backed mortgage have flood insurance. Thus if an individual happens to buy a house or business adjacent to the ocean using a mortgage from a bank, he must purchase flood insurance for that property. And that flood insurance is most likely to be through the NFIP.

The catch, however, is that coastal towns and cities must create and institute specific flood plain management measures designed to lessen the potential of catastrophic losses. If a town chooses not to put into place protective measures, its residents cannot purchase flood insurance through the NFIP.

So far, so good. After all, it’s to the benefit of the coastal property owners that Uncle Sam is underwriting their insurance policies, right? Yes and no. Overall, the NFIP has worked. However 20% of the 5.6 million policies currently within the program apply to properties that have suffered repetitive damage over the years, or were second homes or businesses in high-risk regions of the coast. After two decades of increasingly severe hurricanes, blizzards, and floods, the NFIP has found itself paying out more money than it has taken in. After the damage wreaked by Superstorm Sandy in 2012, the NFIP was $24 billion in the hole.

To correct that imbalance, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 in order to extend the NFIP for five years and to adjust the program so that those 20% of flood insurance policy holders covered a larger portion of their actual risk of flood damage. “Basically the idea was to bring up the rates to be more in line with the actual risk,” said Baker. Seemingly overnight, home and business owners saw their rates rise by 25% each year. If the property was sold, the new owner would have to pay the new premium, which reflected the full insurance risk. As was to be expected, the outcry from coastal property owners was loud and immediate.

“Our insurance costs more than doubled,” said Carl Schwab, a member of the Port Clyde Fishermen’s Cooperative. “But we have to have it [insurance] because we have a mortgage. The only way to get out of it is to pay off the mortgage. And it’s useless. As long as I’ve been here, there’s been no flooding.”

In response to voters’ displeasure, Congress stepped in again, this time passing the Homeowners Flood Insurance Affordability Act of 2014, which rescinded many but not all the provisions of the Biggert-Waters Act. The new law repeals any increases to flood insurance rates at the time of property sale; allows buyers to assume the seller’s current rates; restores grandfathering so properties in one flood zone are not rated in a higher-cost zone when FEMA changes its flood map; and caps premium increases at 18% annually for new properties or 25% for the older ones. Under the new law, some property owners who paid markedly higher rates during the past two years will actually receive refunds from FEMA.

The 2014 Act did confirm some previous changes to NFIP that will affect coastal property owners. “Business properties will still be subject to rate increases if they were built prior to the program. Any secondary homes and buildings that have incurred more than fair market value in damages will also see rate increases,” explained Baker. If a building is newly built or substantially improved since 1982 and lies entirely over the water, such as a bait shed or a restaurant at the end of a dock, no flood insurance is available through the NFIP.FEMA was also in the process of updating its all-important Flood Insurance Rate Maps (FIRM) which are used to determine the risk zone in which a coastal property lies. Maps in Maine, for instance, date from the 1980s and early 1990s. As Baker noted, mapping methodology has become much more sophisticated and accurate since then.

There are a lot of zones on a FIRM; what most people look for is to see if their property lies within a Special Flood Hazard Area. Those are areas that have a 1% risk of suffering damage from a 100-year flood. Over the life of a 30-year mortgage, Baker noted, a building in a hazard area has a 26% statistical probability of being flooded. The chance of a fire over that same period is only 5 to 10%. Those zones are called the A, AE, A1-30, AO, AH, V1-30 and VE zones.

Currently preliminary maps have been completed for York, Cumberland, Knox, Lincoln, Sagadahoc, Hancock and Waldo counties; Washington County’s maps are in draft stage. None of the coastal county maps will go effective until at least July, 2015. In some cases, the preliminary FIRMs indicate that a property formerly outside of a Special Flood Hazard Area is now in one. In other cases, additional data may correct a property’s standing and place it outside of a Hazard Area. Some communities, such as York and Kennebunk, are contesting the methodology used by FEMA to create the maps. “It will be July, 2015, before these maps go into effect,” Baker said.

Schwab is concerned about the impact the increased insurance costs will have on the Port Clyde Fishermen’s Co-op’s long-term health. “We went to a high deductible, something like $50,000,” he explained. “And the premium, well, that cuts right into whatever profit the co-op makes. It’s hard.”

Baker cautions property owners who, after reviewing the preliminary FIRMs, find themselves in a Special Flood Hazard Area not to despair. “For any building that is newly mapped into a flood zone for the first time and they have a mortgage or are considering other federally backed financing, the property owner should get a flood insurance policy as soon as he can, before the maps become effective [in 2015],” she said. “That will lock in the lowest rate for as long as possible. Once you get it, don’t let it lapse.”

While Maine coastal property owners haven’t experienced the repeated damages suffered by the southern states or the devastation wrought by a Superstorm Sandy, major storms do occur in the state, as demonstrated by the No Name Storm of October, 1991. “It has been a long time since this state has been hit with a widespread flooding event. We’ve just been lucky,” Baker said. “It can happen. It’s really only a matter of time.”