In recent years, the United States has been hit hard by hurricanes and flooding that has resulted in billions of dollars in property losses. Many of them were not covered by flood insurance, leaving homeowners with thousands upon thousands of dollars of damages, and some of them without a home. With rising sea levels, heavily developed and populated coastal cities, that more than half of all federal flood claims payments in the last 5 decades are attributed to six storms in the last 15 years, and ever-increasing premiums, flood insurance is a major concern in the United States.

This is by no means an exhaustive review of a complex situation, one that the United States government has been attempting to address for over fifty years. Our goal is to provide an overview of the historical context as it relates to the current state of flood insurance in the United States and provide homeowners and homebuyers with information–a starting point–so that they may begin to seek the solutions that works best for their specific circumstances.

 


There's no such thing as a no-risk zone.

–Cynthia DiVincenti, Vice President for government programs as Aon National Flood Services, published April 7, 2017 in The New York Times, "Flood Insurance: Pricier This Year, And May Go Higher."


 

Flooding is the most common and most expensive, natural disaster in the United States. Many consumers rely on the Federal Emergency Management Agency (FEMA) which oversees the National Flood Insurance Program (NFIP). According to the Chicago Tribune, as of June 30, 2017, the NFIP had just under 5 million policies in force. Of those policies, 68 percent were single-family homes and 21 percent condo units. There is no source for how many homes have private insurance, but real estate data company CoreLogic estimates that approximately 70 percent of flood losses from Hurricane Harvey will be uninsured.

There are two major reasons why many American homes go uninsured from flood insurance. First, many homeowners cannot afford flood insurance because it is cost prohibitive. Second, and perhaps more troubling, many homeowners don't realize they need it. In a recent survey from insurancequotes.com, 56 percent believed flood damage was covered by a standard homeowners insurance policy.

Flooding can catch many off-guard. Some homeowners confuse water damage and believe flood damage is one and the same. This misconception can potentially expose homeowners to catastrophic risk. The reality is, standard homeowners insurance does not typically cover flood damage. Flood insurance is a separate coverage, purchased either through a private insurer or from the federal program.

Because flood damage is so costly, many private insurance carriers decline to offer it. Compounding this issue, the NFIP has experienced rising costs over the past decade. Effective on April 17, 2017, the NFIP increased premiums 6.3%. However, this doesn't include various surcharges that apply, and in some cases, properties that are of high-risk have seen premium increases of up to 25%. In the April 7, 2017 New York Times article, Amy Bach, executive director of United Policyholders, an advocacy group focused on insurance, stated that "four-and-five-figure annual premiums are common in flood-prone coastal areas on the coast and along inland waterways."

Compounding the issue of rising premiums is the fact that the NFIP's finances are strained to the tune of a $25 billion-dollar debt to the U.S. Treasury, funded by taxpayers. Since 1978, nearly $58 billion has been paid out for insurance flood claims. Of that amount, $35 billion were coastal claims attributed to six storms, including Sandy and Katrina, all within the last 15 years. This figure does not account for claims that will be paid out for Hurricanes Harvey, Irma, José, and Maria.

To put the loss in perspective, a brief overview of Hurricane Harvey.

On Thursday, August 24, 2017, as Hurricane Harvey made its way towards the coast of Texas, the National Hurricane Center had issued an advisory for "life-threatening and devastating flooding near coast due to heavy rainfall and storm surge." On Friday, August 25, 2017 at 10:00 p.m., Harvey made landfall as a Category 4 hurricane with maximum sustained winds of 130 mph. It would be considered the strongest hurricane to hit the United States in more than a decade. According to Michael Brennan, a senior hurricane specialist at the National Hurricane Center, "hurricanes are categorized by the strength of their winds, but it is their storm surges that often do the most damage in coastal areas, and can be even more deadly than the winds. By 5 a.m. the following Saturday, although Harvey had been downgraded to a Category 1 hurricane, forecasters warned of catastrophic flooding.

Houston, the nation's fourth-largest city, was hit hard in two directions. From The New York Times, "the storm surge from the Gulf and the torrential rains from above combined to inundate wide areas of the city, turning streets into urban rivers and stranding residents on rooftops, hoping for rescue by boat." By the time the storm was over, the area received over 40 inches of rainfall and as of September 4, 2017, at least 60 deaths could be attributed to Harvey. More than 13,000 people had been rescued and more than 30,000 residents were displaced. According to the Texas Department of Public Safety, floodwaters damaged at least 49,000 homes, with at least 1,000 destroyed. It's estimated that only about one-in-five homes in the greater Houston area are covered by flood insurance.

 


It wasn't supposed to be like this. The government got into the flood insurance business reluctantly, and only after private insurers fled the market because it was too risky and unpredictable.

–Gilbert M. Gaul, published May 23, 2017, at the Yale School of Forestry & Environmental Studies, "How Rising Seas and Coastal Storms Drowned the U.S. Flood Insurance Program"


 

To understand how we got here, how a federally funded program is so deeply in debt, and how hundreds of thousands are uninsured from flood damage, it helps to understand the history of the National Flood Insurance Program (NFIP).

The following is an excerpt from "When Rising Seas Transforms Risk Into Certainty," published April 17, 2017 in The New York Times:

Congress created the NFIP in the late 1960's in response to a series of expensive floods caused by hurricanes and overflowing rivers. Its goal is to offer insurance coverage, some of which is subsidized, to communities that meet floodplain-management requirements; it requires people who want loans to buy houses in dangerous places to buy it; and it also provides grants for mitigation projects meant to reduce flooding damages, like elevating houses or buying out the owners of flood-prone homes. Private insurers including Farmers, Allstate, and 68 other companies also sell and administer the policy on the government's behalf–and take a sizable cut of the premium. If floods do come, though, it's still the government that's on the hook.

The NFIP was meant to encourage safer building practices. Critics argue that instead, it created a pervasive incentive–a moral hazard–to build, and to stay, in flood-prone areas by bailing people out repeatedly and by spreading, and in that way, hiding the true costs of risks. (In 1998, "repetitive-loss properties," buildings that flood over and over, accounted for 2 percent of the NFIP's insured properties but 40 percent of its losses; since then, such losses have only increased.)

And then came Katrina, Wilma, and Rita, which in 2005 left the NFIP with claims six times higher than it had seen in any previous year. To cover them, it borrowed $17.3 billion from the Treasury. Hurricane Sandy in 2012 meant another $6.25 billion in debt, along with allegations that insurance companies distributing FEMA funds were shorting policyholders; 2016, when there were floods in Louisiana, Texas, Virginia and elsewhere, managed to be the third-most expensive year in the NFIP's history even with no single standout catastrophe, deepening the hole further. Servicing the debt is expensive, but FEMA sees no way to repay it, Roy Wright, the NFIP administrator, told Congress last month…although Katrina and Sandy "felt like once-in-a-lifetime events," Wright wrote in a recent blog post explaining the decision, "there is actually a 50 percent chance within the 10-year period the NFIP will once again experience Hurricane Sandy-size losses."

In the aftermath of Hurricanes Harvey, Irma, José, and Maria, Wright's statement is particularly sobering. It also illustrates what's at risk in terms of property losses for Americans whose homes are at risk of flooding and may not have proper coverage.

Gaul wrote, "Sea levels rise and more severe storms are overwhelming U.S. coastal communities, causing billions of dollars in damage and essentially bankrupting the federal flood insurance program. Yet rebuilding continues, despite warnings that far more properties will soon be underwater… now the federal flood program faces no less than an existential threat. As seas rise, coastal floodplains are expected to expand, exposing more property to routine flooding, surge, and waves. By some estimates, hundreds of thousands of U.S. houses could be underwater by the century's end and a trillion dollars worth of property at risk."

According to FEMA, as of late 2016, close to five million households nationwide held federal flood insurance policies. Florida has the most with 1.8 million policyholders, followed by Texas with 608,000, and Louisiana with 472,000.

The NFIP was extended 17 times between 2008 and 2012 and lapsed four times in that period. A 2012 law extended the program until the end of September 2017. If Congress does not reauthorize the NFIP, the program will lapse, preventing people from buying flood insurance. The last time the NFIP lapsed in 2010, an estimated 46,800 home sales transactions were interrupted or canceled. It is the only source of flood insurance for most Americans.

 


Vernon explained that, because of the effort to make the National Insurance Flood Program more financially sound, premiums are set to go up by 18 to 25 percent every year, and cited a study that found each $500 annual increase in flood insurance lowers a home's value by $10,000.

–Brooke Jarvis, published April 18, 2017 in The New York Times Magazine, "When Rising Seas Transform Risk Into Certainty."


 

While the deadline for reauthorization of the National Insurance Flood Program (NFIP) looms over Congress in the wake of Hurricanes Harvey, Irma, José, and Maria, the insurance industry, agents, and homeowners–in response to rising federal premiums–are searching for solutions to make flood insurance more affordable and accessible.

In 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act, "designed to allow premiums to rise to reflect the true risk of living in high-flooded areas." FEMA explains the reasoning behind the Biggert-Waters Act as follows:

Flooding has been and continues to be, a serious risk in the United States–so serious that most insurance companies have specifically excluded flood damage from homeowners insurance. To address the need, in 1968 the U.S. Congress established the National Insurance Flood Program as a Federal program. It enabled property owners in participating communities to purchase flood insurance if the community adopted floodplain management ordinances and minimum standards for new construction. However, owners of existing homes and businesses did not have to rebuild to the higher standards, and many received subsidized rates that did not reflect their true risk. Over the years, the costs and consequences of flooding have continued to increase. For the National Insurance Flood Program to remain sustainable, its premium structure must reflect the true risks and costs of flooding. This is a primary driver for many of the changes required under law.

According to FEMA, the properties most affected by the rate changes are those located within a Special Flood Hazard Area (SPHA) that were "constructed before a community adopted its first Flood Insurance Rate Map (FIRM) and have not been elevated." FEMA further explains that for many communities, the initial FIRM would have been adopted in the 1970s and 1980s and that many of these "Pre-FIRM" properties have been receiving subsidized rates.

A stated goal of Biggert-Waters was to phase out these subsidies for non-primary residences, businesses, residencies that have experienced severe repetitive loss, and properties that have incurred flood-related damages where claims payments exceed the fair market value of the property. The premiums for these properties would increase by 25% per year until they reached their full risk rate.

In response to these sharply increasing premiums, the Congress passed the Homeowner Flood Insurance Affordability Act in 2014, repealing and modifying certain provisions of Biggert-Waters. The U.S. Senate passed the bill with bipartisan support, 67-32. Backers of the bill warned, "that unless premium hikes of up to 10 fold and more are delayed, many Americans will be forced to surrender their homes and small businesses because they cannot afford coverage."

According to the Insurance Information Institute, the Homeowners Flood Insurance Affordability Act reduced some rate increases that were already implemented, prevented some future increases, and puts a surcharge on all policyholders. It also authorized funds for the National Academy of Sciences to complete an affordability study. The 2014 law prevented any policyholder from seeing an annual rate increase exceeding 18 percent. FEMA was to "strive" to prevent coverages from costing more than 1 percent of the amount covered (for example: for $100,000 of coverage, the premium would not exceed $1,000). In some cases, refunds resulted for those who paid above the 18 percent cap. It also reinstated a practice known as "grandfathering," meaning that properties re-categorized as being at a higher risk of flooding under FEMA's revised maps would not be subject to large increases.

 


 

"This could be devastating to so many people. People don't realize they could be remapped into a much more high-risk zone."

–Maria S. Wells, president of Florida Realtors Trade Group, published July 14, 2017 in The Miami Herald, "Flood Insurance Rates Could Rise For Hundreds of Thousands Homeowners Under Proposal."


 

We identified two major problems as to why many American homes go uninsured from flood insurance. First, because flood insurance is cost prohibitive, and secondly, many homeowners don't realize they need it.

Flood mapping has been a constant issue, one that many consider inadequate and harmful. Homeowners can potentially be re-mapped into risk areas and unaware of it, meaning their premiums could unexpectedly rise to unaffordable rates, or they didn't carry flood insurance because they didn't know they were in a high-risk zone.

Consider the effects of Hurricane Harvey. It's estimated that only one out of five homes carried flood insurance. Many of the flooded homes were located far from the designated floodplains. Because of this designation, it's not unreasonable for many American homeowners to believe they don't need flood insurance or have any incentive to pay high costs for what might be perceived as an unlikely event. Unfortunately, this decision could end up having a drastic cost.

According to FEMA:

FEMA publishes hazard maps that show predicted flood levels and flood risk zones based on historical climate information and the best available science…Risk changes over times as conditions in the community change…As newer data are collected (particularly when severe, rare events occur), the expected chance or severity of flooding derived by analyzing these data changes…Flood zone designations can also change as flood risk changes…As new maps are developed, it is possible that structures not previously located within a special flood hazard area will be designated as such, and will therefore be required to obtain flood insurance. Under the new law, a new flood insurance policy may not be subsidized and, therefore, the owner will pay full risk rates.

 


 

"You might have heard the radio or TV weatherman say something like 'This storm has resulted in a 100-year flood' …Instead of the term '100-year flood,' a hydrologist would rather describe this extreme hydrologic event as a flood of that magnitude has a 1 percent chance of happening in any year."

–From The USGS Water Science School, "Floods: Recurrence Intervals and 100-Year Floods."


 

In The New York Times article, "A '500-Hundred Year Flood' Could Happen Again Sooner Than You Think. Here's Why" published on August 28, 2017, Sandra Knight, a senior research engineer at the University of Maryland and former official at FEMA said, "We're looking at historical data when we really have something that is non-stationary. The world isn't stationary anymore and hydrology isn't. The landscape isn't. So why are we still presuming the future will look like the past?"

If FEMA maps are the best we have in predicting floods, and in turn, predicting what homes are at risk, homeowners may want to rethink their strategy. The funding for updated FEMA maps are underfunded. In May 2013, Scientific American reported, "Congress has cut funding for updating map floods by more than half since 2010, from $221 million down to $100 million this year. And the president's latest budget request would slash funding for mapping even further to $84 million in 2014, a drop of 62 percent over the last four years."

As of the time of this writing, the federal government is proposing deeper cuts to the NFIP's Hazard Flood Mapping Program.

Hurricane Harvey and Houston serves as a prime example in floodplain mapping. From The New York Times "How Houston's Growth Created the Perfect Flood Conditions," published on September 5, 2017:

Flood hazard maps by FEMA, showing the 100-year floodplain, an area with a 1 percent risk for flooding in any given year, mark where homeowners are required to have federally sponsored flood insurance. This is one of the few early warning signals the United States has for flooding. For Houston, those maps were thoroughly inadequate. Early assessments show many homes were flooded even though they were located far from the designated floodplains. Many homes in what's known as the 500-year floodplain–with a 0.2 percent chance of flooding in a year–are also flooded.

As illustrated by recent events, the risks of not updating flood maps translates into homes being improperly categorized, which translates into fewer people having flood insurance. Not being able to afford flood insurance is one thing. Not knowing you need it is another.

 


 

"It gives people a feeling of complacency if they are not required to buy insurance."

–Howard Kunreuther, co-director of the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania, "How Houston's Growth Created The Perfect Flood Conditions," The New York Times, September 5, 2017


 

As we've explored the rising costs of flood insurance and its landscape, one of the recurring themes, as made evident by the massive amounts of uninsured homes in Houston, is that many don't think or don't believe they need flood insurance.

While we don't expect to have all the answers to a complex situation, our hope is that by providing the background to a historically difficult problem facing the United States and showing a few examples of how some homeowners have addressed these issues, we may be able to provide direction and actionable steps.

First and foremost, if you are interested in buying homeowners insurance, we recommend doing so as soon as possible. If you're considering buying flood insurance through the federal program, there's typically a 30-day waiting period before its effective date. If you decide to purchase flood insurance through a private company, it may be effective sooner, though the effective date will vary by provider. The bottom line is, if you expect you'll need or want flood insurance, it's important to get the process moving as soon as you can.

Computer simulations have become more powerful and are able to test more variables, and thus, providing a better predictor of risk. The result is more private insurers interested in offering flood insurance.

Evan Hecht is briefly profiled in The New York Times "When Rising Seas Transforms Risk Into Certainty." He's the chief executive of the Flood Insurance Agency, based in Florida. In 2013 in response to the Biggert-Waters act, Hecht and his wife Tiara sought private underwriting from Lloyd's of London. Hecht states most his 19,000 policies in 37 states are properties that require flood coverage because of their locations and where FEMA is raising rates. He estimates that his premiums are 30 to 35 percent less than those bought through FEMA.

Whether you decide to purchase flood insurance or not, always keep in mind that insurance is based upon risk. The best way to protect your assets is to take steps to minimize those risks to lower flood insurance costs. FEMA offers some tips and resources here, whether it's retrofitting your home to mitigate flood damage, communities enrolled in the Community Ratings System, or grant programs that may assist you with the cost of elevating your building.

Mike Vernon, the self-proclaimed "Flood Insurance Guy," was also profiled by The New York Times. He touts his specialty as finding "clever ways to reduce flood premiums." Vernon cites a client who had a rec room in an area that had previously been a garage lower than the first floor. As such, it was deemed "livable space," which FEMA and insurers use to calculate premiums. Vernon recommended converting this space back to "low-value storage space," and lifted the electrical system to higher elevation and added flood vents, significantly reducing his client's premiums. Vernon states, "We're often actually making the building worse to bring down premiums," but in the case of the example above, his client went from paying $6,000 in flood insurance premiums per year to $800 per year.

Before you start doing any actual work or investing money into your property, it's a good idea to discuss this with your insurance agent. You want to be sure that any money you invest into lessening the risk of flood damage will result in lowered premiums.

For example, in a 2014 article in NJ.com, two New Jersey residents raised their homes to well above the federal requirements as outlined in the new flood maps. Both saw massive rate spikes resulting in premiums over $30,000 per year. In Richard Drakes case, prior to raising his home, he consulted with a local construction official and floodplain manager for Union Beach. It was recommended Drake elevate his home at least two feet higher than the minimum standard based on the new map. Drake took it a step further and elevated his home three feet higher. The result? A $32,000 flood insurance bill (he had once paid $598 per year). Despite Drake's compliance, he wound up in a nine-month battle with FEMA, and it wasn't until United States Senator Richard Menendez stepped in and advocated on his behalf for a reduction in premium.

The above example illustrates an extreme in that Drake's flood-insurance increased 55-fold despite him raising three feet above minimum requirements, and he had the assistance of a senator. If anything is to be learned from this, it's that despite a good-faith effort, homeowners can face a multitude of issues when it comes to flood insurance. Not everyone is going to have the benefit of a United States Senator to work on their behalf.

While the cost of flood insurance is prohibitive, the lack of it can be even more financially destructive. If your home is even of a moderate flood risk, we recommend being proactive in terms of mitigating your risk and shopping for flood insurance. Research FEMA guidelines and resources, talk with private insurers, and seek out alternatives such as the Evan Hechts and Mike Vernons of the world. There doesn't appear to be a panacea to a problem that's been facing the United States for decades. Our hope is that by providing you with some historical context, you have a better understanding of what you're dealing with. Our hope is that some of the examples illustrate the changing landscape of flood insurance and provides you with some insight that might be applicable to your home.

One thing is for certain: politics and climate, to some degree, is largely out of your control. The more information you're armed with, the better position you'll be in to best protect your home and assets and be able to make the best financial decision possible. If you're considering steps that will lessen your risk factor, we recommend consulting with FEMA, private insurers, consultants, and local government officials before investing any money. If any assurances or agreements are made, get it in writing. Keep track of any work (receipts, photos, etc.) you've done to lessen your risk factor.

Above all, the best thing you can do for your home, family, and assets is to stay engaged and stay informed. The state of flood insurance in the United States is ever-shifting, and while premiums continue to rise, a proactive approach is your best resource.

Note: If you are denied your flood claim, there are recourses. Get the reason for denial in writing. After your appeal, you can expect an answer in writing within 90 days. There are various reasons they may have denied your claim, such as (but not limited to):

  • The claim was filed within the 30-day waiting period.
  • You missed the proof of loss filing deadline (check your policy of the timeframe for when you must file a claim after an event).
  • You had pre-existing damage.
  • The claim was for a basement area that was not covered.

You'll have a timeframe (most likely 60 days, but this will depend on the insurer) of when you'll have to appeal the decision by. Contact your insurer/agent and notify them you will be appealing the decision. Ask them for the necessary steps and/or channels of the appeal process. Ask for this in writing. In each conversation you have, document the dates, times, and details of the conversation.

Contact FEMA. This brochure has information on supporting your claim. If the appeal is not in your favor, FEMA recommends that you "please refer to your flood insurance policy. See "GENERAL CONDITIONS" Section VII, Paragraph R. "Suit Against Us." The 1-year period to file suit commences with the date of the written denial from the insurer and is not extended by the appeals process. Unless FEMA issued the SFIP directly, it is not a proper party to such a lawsuit even if you appealed the decision."

If you have private insurance and FEMA did not issue the SFIP, review your policy for the next steps following an appeal, and if necessary, consider consulting with an attorney for legal guidance.