Flood Insurance Changes Explained

After being buffeted for years with criticism for encouraging irresponsible development along coastlines, the National Flood Insurance Program has begun phasing out subsidies on policies for high-risk properties.

But some coastal residents in North Carolina are worried that steep increases in premiums will force them to lose their valuable oceanfront investment, or make it impossible for them to sell their older home, even if it had never been flooded.

The Biggert-Waters Flood Insurance Reform Act, enacted in July, will eliminate subsidies in increments over four years for commercial properties, second homes and for those with repetitive losses that are at or below base flood level.

In a provision that some find particularly painful, the new law will also eliminate grandfathered rates based on flood maps in effect at the time the house was built.

The Outer Banks after Hurricane Sandy. Photo: Andy Coburn

That means an older property that predated 1975, or adoption of the community’s Flood Insurance Rate Map – known in insurance vernacular as pre-FIRM – will no longer have its rate based on the old map, resulting in potentially enormous increases in premiums.

Although it will likely be a small percentage affected by the most draconian aspects of the law, the actual impact on property owners up and down the coast is still a big unknown.

“It is one of the most complex and messed up issues I have ever been associated with,” said Spencer Rogers, a coastal scientist with North Carolina Sea Grant.

Spencer Rogers

Rogers, who specializes in coastal hazards, said that while the law provides exemptions and discounts that will at times result in lower insurance bills, it also could cost some property owners more in insurance premiums than the value of their house. He wrote a paper that explained the changes in the program.

“It’s been recognized sooner or later that those subsidized rates had to end,” he said. “Maybe it’s time, maybe it’s not . . . It will jack up the rate on a business or a second home, but if you’re living in it, you’re exempted from the worst of it.”

A property is categorized as a repetitive loss if two or more claims of at least $1,000 have been filed within a 10-year period; a severe repetitive loss property would have four or more claims of more than $5,000, or two or three claims that together exceed the value of the property.

According to the state Insurance Commissioner’s website, North Carolina has 81,000 flood insurance policies in effect covering more than $10 billion in property.

Partly because of the enormity of claims made after Hurricane Katrina in 2005, the NFIP is in debt more than $17 billion -and that does not include the $9 billion borrowed to cover Hurricane Sandy claims.

Tom Thompson, chairman of NC-20, a group that represents the real estate and construction industries in the state’s 20 coastal counties, warns that except for the repeat claims, the increases in Biggert-Waters are unfair and excessive, and could “sink the coast. “

“It was conceived in complete ignorance,” he said about the law. “FEMA mismanaged the program and paid for losses for properties that weren’t even part of the program.”

North Carolina, he said, has contributed more in premium payments over the life of the program than the National Flood Insurance Program –which started in 1969– has paid for claims in the state: $1.2 billion in premiums versus just over $1 billion in claims.

“We’re a donor state,” he said. “The program worked. Why do our insurance rates have to go up some 2,000 percent?

“People cannot afford it. They’re going to lose their home.”

Thompson cited one man with a 34-year-old, never-flooded retirement house in North Topsail Beach whose quoted rate went from $3,300 a year currently to $59,000 under the new law. With a higher deductible and no content coverage, the rate would be lowered to about $29,000 a year.

In a letter to Thompson, responding to his appeal for help, U.S. Rep. Mike McIntyre, D-NC, said that some homeowners could have their rates jacked up 40 to 50 times their current rate, that is, a 4,000 to 5,000 percent increase.

“Folks from all across Eastern North Carolina have expressed to me their very serious concerns about the impact that increased flood rates would have on homes, communities, and the local economy,” McIntyre wrote. “We are going to do all we can to derail this increase.”

McIntyre said he has co-sponsored legislation to delay the law.

But Fletcher Willey, who had sat on a state panel dealing with flood insurance issues for ten years and has handled flood insurance for clients through some 30 hurricanes, said that most people won’t be facing the astronomical spikes in their insurance bills that they fear.

“Eighty-one percent of the properties are going to be just fine,” said Willey, owner of The Willey Agency in Nags Head.

Willey said that if properties are adequately elevated they won’t see large increases. And unless the older homes are sold or damaged substantially, pre-FIRM residences -that is, those built prior to 1975 or before the community’s Flood Insurance Rate Maps were drawn -will have gradual increases rather than huge jumps.

Many properties will benefit by getting an elevation certificate, he added.

“So,” he said, “the sky is not falling.”

According to information provided by the North Carolina Floodplain Mapping Program at the state Department of Public Safety, notice of a 25 percent rate increase was sent in January to about 305,000 second-home owners of pre-FIRM properties. Of them, about 4, 700 are in North Carolina. Rates are expected to increase an average of 150 percent.

Primary residences must be lived in at least 80 percent of the time.

The next wave of notices were sent in October to owners of about 90,000 commercial properties – 2,143 of them in North Carolina – and to about 11,000 properties – 707 of them in North Carolina – that have suffered repeated flood loss.

By late 2014, rates will no longer be grandfathered according to what the flood rating, relative to map zone and building elevation, had been when the structure was built. Those premiums will be phased in with 20 percent increases over five years, starting with the effective date of the FIRM that identifies the increased risk, until the rate reflects the actuarial rate based on newly updated flood maps. Premiums for the 515,000 properties affected statewide could increase 200 percent, according to the state. And pre-FIRM rates will be discontinued on new flood policies, potentially causing enormous leaps in premiums for new owners and making it much more difficult to sell such property.

Rogers said the ending of older rates, which is just starting to be implemented, is likely to cause “loud screams” because the rate will change instantly to the actuarial rate – the risk based on the new maps.

Nightmare scenarios can result when even a post-FIRM property that did all the right flood mitigation measures has to update to the new flood maps and finds itself in a higher risk zone. For example, one property Rogers cited that was below base flood levels near the ocean would go from an annual rate of $19,000 a year to $53,000 a year.

But other situations, he said, may be able to qualify for various discounts –some significant -by elevating, moving or altering the house. Just getting an elevation certificate, he said, can reduce premiums and avoid future increases.

“There are lots and lots of variables on the rating structure,” he said. “It is very difficult to compare apples and apples in insurance rates.”

About the Author

Catherine Kozak

Catherine Kozak has been a reporter and writer on the Outer Banks since 1995. She worked for 15 years for The Virginian Pilot. Born and raised in the suburbs outside New York City, Catherine earned her journalism degree from the State University of New York at New Paltz. During her career, she has written about dozens of environmental issues, including oil and gas exploration, wildlife habitat protection, sea level rise, wind energy production, shoreline erosion and beach nourishment. She lives in Nags Head.