Current Trends in the National Flood Insurance Program

Current Trends in the National Flood Insurance Program

Over the past several years the landscape of the National Flood Insurance Program (NFIP) has changed dramatically. After the 2005 hurricane season (Katrina, Rita, and Wilma in particular) the NFIP was in a position of financial insolvency, claims were exceeding funds and the program went into debt.

In an effort to address the financial woes congress passed legislation known as the Biggert-Waters Flood Insurance Reform Act of 2012 (BW 12).  Extending the NFIP for 5 years (through 9/30/2017), this law also changed several major components of the said program. Most notably it changed the way Pre-FIRM and Grandfathered structures were treated. After extended push back from the public and professionals alike a follow up legislation was passed to address BW 12’s shortcomings and overcompensations, this bill is known as the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA 14).

The following is a brief comparison of the two, with particular concentration on the changes to Pre-FIRM and Grandfather homes.

PRE-FIRM STRUCTURES

Primary Residences:

While these bills covered a lot of legal ground, there are several segments in particular that invoked clamor and attention, one of these being pre-FIRM Primary residences.

Under BW 12 pre-FIRM primary residences (ones occupied 80% of the policy year) would not see any rate increase at all unless one or more triggers were hit. These triggers were 1) if the property was sold, 2) if a property was uninsured as of BW 12 enactment, 3) if the policy lapsed, and/or 4) if a mitigation offer was refused. Once one or more of these triggers were hit the full-risk rate would immediately take effect. HFIAA 14 changed most provisions surrounding these properties.

Under HFIAA 14 all pre-FIRM primary residences (will be newly categorized on 6/1/2014 as one occupied for 50% of the policy year) will see an annual rate increase of no more the 18% per year regardless of any triggers. While HFIAA 14 did add this provision it removed a more cumbersome portion of BW 12 which stated that the sale of a home would result in an immediate jump to a full-risk rate. This will aid the real estate market by allowing buyers to assume the subsidized rate from the seller.

              

Secondary, Non-Residential, SRL, & High Claim Buildings:

Another class of pre-FIRM properties affected by BW 12 was Secondary, SRL, and High Claims Structures. BW 12’s main goals were to remove all pre-FIRM, federally subsidized, insurance premiums over time. It immediately implemented this new glide path to full risk rate on Pre-FIRM secondary structures. Premiums on these structures were to go up 25% per year till full risk rate is achieved. All non-residential, severe repetitive loss (SRL), and properties whose claims exceed fair market value were to see this exact schedule of rate increase as well.

HFIAA 14 maintained this portion of the original bill. All non-primary, non-residential, SRL, and properties whose claims exceed fair market value are still subject to the 25% increase in premium, per year, till the rate reflects full risk.

GRANDFATHERED STRUCTURES:

A third major class of properties affected by BW 12 was grandfathered structures. BW 12 sought to phase out grandfathering by imposing a premium increase of 20% a year for 5 years when full-risk rates would be achieved. HFIAA 14 all but repeals this and produced a new glide path. Under HFIAA 14 once a map change produces a change in a structure’s flood status (aka grandfathered, from low to high risk) the initial policy will be at the original preferred rate. In all subsequent years the premiums will increase by no more than 18% until full-risk rate is achieved.

While BW 12 and HFIAA14 treated these structures differently, the foggy definition itself was maintained throughout both acts. While strict grandfathering (structure placed into a SFHA on new regulatory map) is addressed, other forms are not. Neither piece of legislation clearly addresses how changes in the zone designation (e.g. from A to V zone) or the base flood elevation (e.g. from bfe 10 to 12) are to be treated. Implementation of the law in these cases remains to be seen.

HFIAA 14 also introduced brand new requirements as well. In an effort to raise more money for the NFIP, HFIAA 14 placed surcharges on all policies ($25 primary, $250 on all other). These surcharges will help to refund excess premiums that were paid by some homeowners who suffered the immediate full-risk rate increase set forth by BW 12 and repealed by HFIAA 14.

In the end the provisions of BW 12 were a bit too deep cutting. The abrupt changes produced negative effects on the real estate market and home values in general. The NFIP’s goal is to keep people and property safe (not increase home prices) and the realization that the changes were too drastic was generally welcome by all. HFIAA 14 made these changes a bit softer and easier for most people to handle. It should also help address the financial instability of the NFIP while allowing communities to continue to build safe and resilient.

References

U.S. House. 112th Congress, 2nd Session. H.R. 4348, Biggert-Waters Flood Insurance Reform Act of 2012. Washington, Government Printing Office, 2012.

U.S. House. 113th Congress, 2nd Session. H.R. 3370, Homeowners Flood Insurance Affordability Act of 2014. Washington, Government Printing Office, 2014.

Disclaimer

 This blog is intended to provide basic, background information on the identified subject matter. It is in no way meant to provide legal advice. For interpretation and implication of the law, please contact an attorney.