How Recent Legislative Changes Affect Flood Insurance

Originally posted On August 25th, 2014, posted in: Industry Issues by Matt for Eustis Mortgage

Flood damage is a terrifying reality for homeowners in some parts of the country, and realtors have been especially vocal about the need for reform to the National Flood Insurance Program (NFIP).

Congress first created the NFIP in 1968 to provide property owners a means to protect their investments and financial security by offering flood insurance to homeowners, renters and business owners if their community participates in the NFIP. Communities which join the NFIP agree to adopt and enforce ordinances which reduce the risk of flooding.

Real estate professionals have started hearing about skyrocketing rate hikes to existing flood insurance policies, as changes mandated by Congress (and signed into law by President Obama as the Homeowner Flood Insurance Act of 2014 earlier this year) began to take effect.

New policy quotes were inaccurate at best —and blatantly wrong at worst. Rate hikes are often aggressive; some policyholders are caught between the necessity of flood insurance and the increasing cost of maintaining those policies. It is prudent to maintain and keep current flood insurance policies while new provisions are being enacted. Property owners who allow policies to lapse will be wholly unprotected in the event of a flood.

What do the Flood Insurance Legislative Changes Mean?

Key provisions in both the 2012 and the 2014 versions of the NFIP apply primarily to older buildings; namely, those that were constructed before a community’s first Flood Insurance Rate Map or FIRM. Pre-FIRM buildings located in high flood-risk areas typically subsidized policies to keep costs low. While most subsidies remain intact, they will be slowly phased out over time.

Policies for pre-FIRM high-risk areas now carry minimum increases (capped at 18%) until premiums reach their full-risk rates using data from a FEMA Elevation Certificate. An elevation certificate verifies all buildings within a geographic area meet minimum elevation standards. Property owners may use FEMA Elevation Certificates to obtain flood insurance policies.

The chart above only applies to primary residences and non-commercial buildings. Second/vacation residences and commercial properties also qualify for subsidized rates carrying over from 2012, but those policies will increase to full-risk rates at a faster pace compared to those policies for primary residences.

Under the Biggert-Waters Reform Act of 2012, pre-FIRM properties sold were required to carry polices at full-risk rates. Subsidies disappeared. The result? Premiums increased significantly. The Homeowner Flood Insurance Act of 2014 reauthorized subsidized rates.

If you are a property owner holding a new policy triggered by the sale of a pre-FIRM property, you are entitled to a refund. Similarly, the 2014 law allows for the transfer of an existing flood insurance policy from the seller to the buyer, including all grandfathered rates.

There are a few other provisions that property owners and realtors should pay careful attention to: surcharges and deductibles.

In order to offset the subsidized policies reauthorized by the 2014 version of NFIP, policies for primary residences carry a $25 surcharge. All other policies will carry a $250 surcharge. The surcharges will take effect in 2015, so there’s still time to plan.

The Homeowner Flood Insurance Act of 2014 also raises the maximum residential deductible limits from $5,000 to $10,000, helping keep premium costs in check.

As FEMA implements these changes to the NFIP, you’ll likely have questions. The FEMA website is a great resource for inquiries related to NFIP reforms, but keep your insurance agent on speed dial to address any concerns tied to your policy.

To learn more, contact:
Mimi Denis 
NMLS# 87275
Vice President
Eustis Mortgage 
Mortgage Specialist 
1100 Poydras Street #2525 
New Orleans, Louisiana 70163
504-565-5226 Direct 
504-237-4927 Mobile 
504-324-0437 Fax