Understanding how flood insurance works is vital to providing excellent service in the property/ casualty field. And it is a huge unmet need based on these statistics from a 2010 poll by the Insurance Information Institute:
- 10 percent of Americans had a flood insurance policy, down from 13 percent in 2009 and 17 percent in 2008.
Flood Coverage
Flood damage is excluded under standard homeowners and renters insurance policies. Flood coverage, however, is available in the form of a separate policy both from the National Flood Insurance Program (NFIP) and from a few private insurers.
Background
Congress created the NFIP in 1968 and is currentl considering reforms and an extension of the program. The NFIP was created in response to the rising cost of taxpayer-funded disaster relief for flood victims and the increasing amount of damage caused by floods. The NFIP makes federally backed flood insurance available in communities that agree to adopt and enforce floodplain management ordinances to reduce future flood damage. The NFIP is self-supporting for the average historical loss year. This means that unless there is a widespread disaster, operating expenses and flood insurance claims are financed through premiums collected. However, the program is operating with a defici of $17 billion.
The NFIP provides coverage for up to $250,000 for the structure of the home and $100,000 for personal possessions. Private flood insurance is available for those who need additional insurance protection, known as "excess coverage,” over and above the basic policy or for people whose communities do not participate in the NFIP. Some insurers have introduced special policies for high-value properties. These policies may cover homes in noncoastal areas and/or provide enhancements to traditional flood coverage. The comprehensive portion of an auto insurance policy includes flood damage.
In March 2010 when the NFIP was up for extension Congress failed to act and left homeowners and insurers in the lurch. As a result, the federal flood insurance program’s authority to write new policies ended on Sunday, March 28, 2010 at midnight. After that time, insurance agents were not able to provide new or renewal flood insurance policies holding up 1,400 home sales each day in flood-prone areas at the time. Those sales were on hold because those policies wre required by lenders to close on some real estate sales. The the program expired again late May 2010 without just the short-term extension granted in April.
While the program losses an average of nearly $1 billion each year, "there's always been a few in Congress that have had enough political muscle" to keep rates low and restrictions loose, former FEMA Assistant Administrator David Maurstad said.
Reform Proposals, 2011:
Two measures to extend and reform the flood insurance program have been introduced in Congress One, HR 1026, was drafted by Rep. Maxine Waters, D.–Calif., who introduced similar legislation in the last Congress. Last year’s bill passed the House but was never put to the vote in the Senate. The other piece of legislation was proposed by Rep. Judy Biggert, R. –Ill., who chairs the Insurance, Housing and Community Opportunity Subcommittee of the House Financial Services Committee. The measure aims to reduce rate subsidies and make the program ultimately actuarially sound, extends the program for five years to September 30, 2016, adds optional coverage for extra living expenses coverage to compensate policyholders forced to move out of their homes and adds business interruption (income) coverage to help flooded businesses survive a shut-down period, among other provisions.
The draft bill makes no mention of forgiving the NIFP’s debt. However, it would require both the Controller General and FEMA to conduct studies on the privatization of the federal program and to report to Congress within 18 months.
Federal Emergency Management Agency (FEMA), had sought input last year on various alternatives from reform of the current program to dropping federal involvement in flood insurance altogether. FEMA also requsted on the “Write-Your-Own” flood insurance program, to ascertain whether they would be willing to shoulder some or all of the risk. Under the “Write-Your-Own” program, private insurers issue policies and adjust claims but the federal government retains responsibility for actual losses.
Specific Coverage Impact Beyond Floods
Adding Coverage For Wind Damage: Legislators who promoted adding wind coverage to the NFIP’s policies as an option to reduce disputes over wind versus flood losses were defeated in the November 2010 election. The Obama administration, leading environmental groups, consumer advocates and taxpayer watchdogs were all opposed to the proposal.
Mandatory Flood Insurance: As a possible solution to the question “was the damage caused by wind or water?” South Carolina started requiring wind pool policyholders to purchase flood insurance in January 2008. Without it, they may not receive reimbursement for the full replacement cost of repairing storm damage. About 70 percent of wind pool policyholders already had flood coverage. As a result of the new law, several thousand additional residual market policyholders have now purchased it. Wind pool officials say the new mandate is designed to avert disputes about the exact cause of damage, a situation that may have held up some claim settlements after Hurricane Katrina. Most of the state is susceptible to flooding, they said. Several other states require that policyholders in state-sponsored property insurance programs purchase flood insurance.
