Summary: The Federal Emergency Management Agency (FEMA) estimates that there are between six and eight million buildings in the United States with a flood exposure, and that approximately six million of these buildings are uninsured for this hazard. These numbers are growing all the time, as the population shifts from landlocked to coastal areas. The National Flood Insurance Program (NFIP), created by the National Flood Insurance Act of 1968, was put in place to provide flood insurance to eligible insureds. The water damage exclusion in standard property forms, both personal and commercial, applies to flood damage and, therefore, no coverage for this peril is included in these policies.

Following is an overview of the background, rules, and rating of the program.

Topics covered:

Increased need for flood insurance

Background of the national flood insurance program

"Write your own" program

Forms

Property eligibility

Coastal barrier resources system

Waiting period

Emergency program; one hundred year flood

Regular program

Rating

Preferred risk policy

Increased Need for Flood Insurance

 The end of the past century has seen the population of the United States continue to shift from the interior to the coast. Not only has this resulted in an increased need for flood insurance, but it has also resulted in the fact that buildings that are consistently flooded are the subject of special focus. The Federal government has had to step in to encourage those homeowners who repeatedly file claims to relocate. (See the following discussion.) A few statistics are show in the following table:

In the contiguous United States, the coastal land area accounts for about one-fifth of the total land area, yet contains over a half of the population. The United States contains some 673 counties designated as coastal, which means that at least 15 percent of their land area is in a coastal watershed. Two hundred eighty-five are Atlantic, one hundred forty-two are Gulf, eighty-eight are Pacific (Hawaii is completely coastal), one hundred fifty-eight are Great Lakes. This does not include the interior areas that are subject to stream and river flooding.

 Background of the National Flood Insurance Program

 Flood insurance, while not generally written on a direct basis by private insurers, is widely available through the National Flood Insurance Program (NFIP). The original program, created by the National Flood Insurance Act of 1968, was amended by the Flood Disaster Protection Act of 1973, which introduced a mandatory element into the program and broadened the amount of coverage available to eligible insureds.

 The program was amended again by the National Flood Insurance Reform Act of 1994, which required, among other things, that Federally insured or regulated lenders must notify borrowers or lessees that the property is located in a special flood hazard area and that flood insurance is required. Flood insurance coverage (currently $20,000) for the cost of complying with floodplain management building regulations was provided in the Act.

 Coverage can be purchased through any licensed property and casualty insurance agent and also through some private insurance companies cooperating in the NFIP's "Write-Your-Own" program (see following section). According to FEMA, as of the end of December 2003 there were 4,557,700 policies in force, and total dollar claims for the year 2003 were $605,375,259.

 The NFIP is a Federal program administered by the Federal Insurance and Mitigation Administration (changed from the Federal Insurance Administration), which is part of FEMA (Federal Emergency Management Agency). This program enables property owners to purchase flood insurance. This insurance is designed to provide an insurance alternative to disaster assistance to meet the escalating costs of repairing damage to buildings and their contents caused by floods.

 It should be noted that disaster assistance is not automatically available. For one thing, more than 90 percent of all disasters are not Presidentially declared, and therefore no Federal assistance is available. And, of those that are declared, over 90 percent include flooding. As of October 2002, out of thirty-five declared disasters, twenty-eight involved flooding (80 percent to date). The President must declare a major disaster before most forms of assistance are offered—FEMA's Individual and Family Grant Program, for personal property, and Temporary Housing Program, for home repair and rental assistance. Further, to qualify for home repair assistance, the damaged home must have such relatively minor damage that it can be quickly repaired; rental assistance is available only if the home has been destroyed or significantly damaged.

 The NFIP is based on an agreement between local communities and the Federal government that states that if a community will implement measures to reduce future flood risks to new construction in special flood hazard areas (SFHAs), the Federal government will make flood insurance available within the community as a financial protection against flood losses that do occur. The NFIP is also charged with mapping the nation's floodplains. The resulting rate maps are referred to as FIRMS—flood insurance rate maps. The 1968 Act allowed rates of buildings built or substantially improved prior to the effective date of a community's initial FIRM or December 31, 1974, whichever was earlier, to be subsidized by the Federal government. These buildings are referred to as pre-FIRM. The rates for those buildings built or substantially improved after the effective date of a FIRM or December 31, 1974, whichever is later, are post-FIRM and are not subsidized.

 Flood insurance can be written only in those communities that have been designated as eligible by the Federal Emergency Management Agency. An eligible community is one that has been notified by FEMA that it contains flood prone areas. While unincorporated areas in an approved county are eligible, incorporated communities in that county may not be. Incorporated villages or towns must obtain their eligibility independently of the county.

 Once notified, a community must make prompt application to join the program and indicate a willingness to set up and enforce floodplain management standards aimed at avoiding and reducing future flood damage. Only communities with flood problems that have not as yet been notified may also join the program by making application to FEMA and expressing a willingness to institute the required floodplain management measures.

 In the event a community with a potential flood hazard does not enter the program, it will eventually be notified by FEMA that it is flood prone, nevertheless. This notification takes the form of a Flood Hazard Boundary Map (FHBM) published by FEMA that shows the areas subject to severe flooding within the community. Upon receipt of such notification, the community has one year in which to enter the program. Once the community expresses its willingness to institute floodplain management measures, members of the community become eligible for insurance.

 If a community chooses not to participate, there are ramifications. Grants, loans, or guarantees made by Federal agencies such as the FHA are prohibited for acquisition or construction of property. Lending institutions insured or regulated by a Federal agency may make conventional loans, but generally will avoid doing so because of the risk involved should their accounts be audited. Further, no Federal assistance for acquisition or construction will be provided if a flood occurs, nor will assistance for housing and personal property be available. No one can purchase flood insurance in a nonparticipating community.

 Currently, of particular concern are regular losses to the same properties. These are the repetitive loss properties that have been eligible for reduced premiums and have been flooded on more than one occasion. These properties have accounted for some $1.8 billion in claims over the years. Some of the buildings have sustained two or more losses where the total amount paid equaled or exceeded the property value. Rather than continuing to pay these claims, FEMA is focusing on loss prevention. Property owners are being offered financial assistance to elevate or, in some cases, move. In some instances, communities are buying and demolishing the at-risk properties. Those policy holders refusing help are being asked to pay full premium, which for a repetitive loss property could be substantial.   

 "Write Your Own" Program

 In 1983 the Federal government began the "Write Your Own" (WYO) program to encourage private insurers to participate in the NFIP. Prior to that time, flood policy sales did not achieve the hoped-for amount. By using private carriers, particularly their marketing and customer data bases, policy count and geographic distribution increased. Under the "Write Your Own" program, a participating company sells flood policies under its own name, collects premiums, keeps a stipulated percentage of the premium to cover operating expenses and commissions, and invests the remainder. The insurer is then responsible for servicing the policies and adjusting losses and paying claims.

 The federal government retains responsibility for any underwriting losses. There are currently about eighty-six companies participating in the WYO program.

 Forms

 The NFIP program consists of three forms. There is the dwelling form, used with one-to four-family dwellings and eligible manufactured housing. It is also used to insure a unit within a residential condo building. The residential condominium building association policy (RCBAP) is used to insure residential condos (and commonly-owned contents) not in the Emergency Program. Finally, the general property form is used for commercial establishments, residential condos in the Emergency Program, timeshare buildings not in the condo style of ownership, and cooperative buildings.

 The chief difference among the forms is that the dwelling form and RCBAP allow replacement cost, while the general property form settles loss strictly on an actual cash value basis.

 Property Eligibility

 Eligibility rules, as well as all other policy writing rules and rating information, are contained in the flood insurance manual. The manual, application forms, maps, and other supplies, can be obtained from FEMA. Flood insurance may be written on most types of residential or nonresidential buildings located in an eligible community, provided they (1) have two or more exterior rigid walls; (2) are roofed; (3) and are principally above ground (meaning at least 51 percent of its actual cash value, including machinery and equipment, is above ground level). Contents of eligible buildings are also eligible for coverage. However, if contents are located in eligible buildings that do not have rigid walls on all sides, the contents must be secured to prevent flotation out of the building during flooding. The only appurtenant structure eligible for coverage is a garage under the dwelling form; other appurtenant structures must be written on separate policies. Blanket insurance is not allowed, although from two to ten buildings may be scheduled on the general property form so long as they have the same ownership and the same location, or are located on contiguous properties.

 A mobile home (referred to in the manual and in the coverage forms as manufactured housing) is eligible for flood insurance only if it is (1) on a permanent foundation and (2) anchored to a permanent site if located in a Special Flood Hazard Area. Anchoring entails over-the-top or frame ties to ground anchors, or in accordance with the manufacturer's specifications, or in accordance with the community floodplain management requirements. Mobile homes insured continuously since September 30, 1982, can be renewed under previously existing requirements if affixed to a permanent foundation. Travel trailers are now eligible as mobile homes if they have been anchored to a foundation and their wheels removed. Residential one-to four-family buildings and individual residential condo units written on the dwelling form are eligible for up to $250,000 in building coverage and $100,000 personal property coverage.

 Residential condominium buildings and contents are likewise eligible, with the special provision that if a condominium unit owners association does not have adequate flood insurance, a unit owner may (often at the insistence of a mortgagee) purchase insurance for the contents and the unit. A residential condominium building not in the emergency program may be insured on the Residential Condominium Building Association Program form, or RCBAP, as noted above. The limit of coverage for the building is the replacement cost or number of units times $250,000, whichever is less; for commonly-owned contents, the limit is a maximum of $100,000. A residential condo building in the emergency program must be insured on the general property form, with a limit of $100,000 on the building and $10,000 on the commonly-owned contents.

 Cooperative residential buildings can currently be insured for a maximum building coverage of $250,000 on the general property form. Time share buildings not in the condominium form of ownership, where at least 75 percent of the area is used for residential purposes, can also be insured for a maximum of $250,000 on the general property form. Timeshare buildings in the condominium form of ownership are eligible for coverage to the maximum currently allowed in the RCBAP program (replacement cost or number of units times $250,000). A residential building containing more than four units, other than those previously noted, may be insured on the general property form. Coverage is limited to $250,000 on the building and $100,000 on contents.

 Newly constructed or substantially improved buildings that have floors partially over water, except for pre-FIRM buildings, must be submitted for an underwriting decision and rating, with the likelihood of very high rates. However, pre-FIRM buildings constructed or substantially improved prior to October 1, 1982, and partially over water are eligible for normal pre-FIRM rates. Boathouses located partially over water—that is, the nonboathouse portions—are eligible if the building is partially over land, and also used for residential, commercial, or municipal purposes.

 Newly constructed or substantially improved buildings located entirely in or on water or seaward of mean high tide are not eligible. Post-FIRM buildings constructed prior to October 1, 1982 and entirely over water must be submitted for an underwriting decision and rate.

 Silos, grain storage buildings, and cisterns, even if they are of container type construction, are eligible, but other container type structures are not.   Examples of the excluded types of containers are gas and liquid tanks, chemical or reactor container tanks or enclosures, brick kilns, and similar units and their contents. The contents of silos, grain storage buildings, and cisterns are insurable. Commercial contents are insurable except for contents located in an ineligible structure or in a building not fully walled. Bailees' customer goods and stock consisting of automobiles, motorcycles, or motorized equipment are not eligible for coverage.

 Buildings in the course of construction (builders risks) can be provided flood insurance for the benefit of the owner, builder, or mortgagee. However, there are conditions. The amount of the deductible for each loss occurrence before the building is walled and roofed is twice that selected to apply after the building is walled and roofed. There is no coverage until a building is walled and roofed where the lowest floor, including basement floor, of a nonelevated building or the lowest floor of an elevated building is below the base flood elevation in Zones AH, AE or A1-30, AR, AR/AE, AR/AH, AR/A1-A30, AR/A, AR/AO, or is below the base flood elevation adjusted to include the effect of wave action in Zones VE or V1-30. Materials and supplies to be used in construction are not covered unless contained within an enclosed building either on the premises or adjacent to the premises.

 Coastal Barrier Resources System

 Certain buildings and their contents located within areas designated as coastal barriers or otherwise protected areas under the Coastal Barrier Resources Act of 1982 and the Coastal Barrier Improvement Act of 1990 may not be eligible for coverage. The laws were enacted as a means of discouraging development in high-risk areas. Only buildings constructed before the dates established by the Act remain eligible for Federal flood insurance.

 Buildings constructed prior to October 1, 1983, and not substantially improved or damaged after that date are eligible under the 1982 Act. Eligibility under the 1990 act requires that, for coastal barrier resource systems areas, a building's start of construction be prior to November 16, 1990, and that it not have been substantially improved or damaged after that date. For otherwise protected areas, buildings built prior to November 16, 1991 and not substantially damaged or improved after that date, or buildings used in a manner consistent with the purpose for which the area is protected, regardless of the construction date, are eligible. If a policy has been mistakenly issued to a nonqualified building any loss will be denied, the policy canceled, and the premium refunded. The flood manual contains a list of communities where coastal barriers or otherwise protected areas have been identified. 

 Waiting Period

 There are many rules, found in the flood manual, governing the waiting period, that is, the time between the application date and the date of acceptance. There is a standard thirty-day waiting period for new applications and for endorsements to increase coverage. For most new policies, the effective date will be 12:01 A.M., local time, on the thirtieth calendar day after the application date and the presentment of premium, which must accompany the application. There are numerous exceptions. First are new policies written in connection with making, increasing, extending, or renewing a loan. These are effective at the time of the loan closing, providing application is made and premium presented at or prior to the closing. Second are new policies in connection with mortgage portfolio reviews. (The Mortgage Portfolio Protection Program is designed to help lending institutions comply with the Flood Disaster Protection Act of 1973, as amended. Policies written through the MPPP are placed with WYO companies only.) Third are new policies written when the purchase of flood insurance is in connection with the revision or updating of a flood hazard boundary map (FHBM) or flood insurance rate map (FIRM). Finally, new policies written on a submit-for-rate basis are effective at 12:01 A.M. local time on the thirtieth calendar day after the presentment of premium, with three exceptions: in connection with a loan, when the lender determines that a property that did not have flood coverage should have it, and during the thirteen month period beginning on the effective day of a map revision.

 If a community is just entering the program, or is converting from the emergency to the regular program, the above rules and exceptions apply. Generally, endorsements requesting a new coverage or an increase in limits are effective 12:01 A.M. local time on the thirtieth calendar day following the date of endorsement and the presentment of additional premium. This thirty day waiting period does not apply when the additional amount of insurance is requested in connection with a loan, such as a second mortgage, home equity loan, or refinancing. The increase is effective at the time of closing, provided the increase is applied for and the additional premium presented prior to or at the closing. The other exception is during the thirteen month period beginning on the effective date of a map revision, when the FIRM is revised to show the building is in a special flood hazard area when it had not been in the flood hazard area.

 Emergency Program; One Hundred Year Flood

 The Emergency Program was set up when it became clear that it would take longer to properly identify, map, and establish rates for floodplain areas than initially anticipated. Prior to the Program's establishment, communities had to have been mapped and have flood-risk zones in place before they could participate in the National Flood Insurance Program. The Emergency Program, where limited, Federally-subsidized coverage is available, allows a community time for the Flood Insurance Study that will eventually determine rates.

 There are many references throughout the flood manual and in informational materials from FEMA about the one hundred year, 1 percent, or base flood. This is simply a standard that has been set—a benchmark, if you will—to measure the chance of flooding in any given area. According to The National Flood Insurance Program Description (FEMA, 2002), "The 1-percent-annual- chance flood (or 100 year flood) represents a magnitude and frequency that has a statistical probability of being equaled or exceeded in any given year, or stated alternatively, the 100-year flood has a 26 percent (or 1 in 4) chance or occurring over the life of a 30-year mortgage."

 FEMA is required to notify all communities that have one or more areas containing special flood hazards. It publishes a Flood Hazard Boundary Map (FHBM) that shows the areas subject to flooding within these communities. The map is issued with a community number that identifies the particular community. It is possible that many communities will not, at the time of numbering, be actually participating in the Emergency Program. A community may become eligible for the Emergency Program before the actual distribution of the map by completing an application to FEMA. Agents are responsible for determining whether a community is eligible and for obtaining the community identification number before they attempt to sell flood insurance. Local communities maintain a copy of the map; additionally, this information is available from FEMA.

 The FHBM is used until publication of the FEMA flood insurance rate map (FIRM). Until a community enters the regular program only limited coverage is available. The second map issued by FEMA is actually the product of the flood insurance study mentioned earlier. It indicates the degree of flood hazard in the special flood hazard area, and actuarial rates are based on this.

 As stated, only limited amounts of coverage are available. For building coverage: single-family dwelling or two-to four-family dwelling, $35,000 ($50,000 in Hawaii, Alaska, U.S. Virgin Islands, and Guam); other residential, $100,000 ($150,000 in Hawaii, Alaska, U.S. Virgin Islands, and Guam); non-residential, $100,000 ($150,000 in Hawaii, Alaska, U.S. Virgin Islands, and Guam). For contents coverage (per unit): residential, $10,000; non-residential, $100,000.

 Regular Program

 Once FEMA has completed the flood study, which is aimed at developing technical information, including minimum first floor elevations for land use purposes, the results are given to the community. The community has 90 days in which to appeal the elevation figures established by FEMA. During this period, flood insurance at subsidized rates remains available under the Emergency Program. Once a final determination on flood elevation is made and accepted, FEMA publishes the flood insurance rate map (FIRM) for determining actuarial rates. When the map is published, the community is converted to the regular program and additional insurance is available.

 The amounts of insurance available for building coverage are: single-family or two- to four-family dwelling, $50,000 base plus an additional $200,000 for a $250,000 maximum; other residential, $150,000 base plus an additional $100,000 for a $250,000 maximum; nonresidential, $150,000 plus an additional $350,000 for a $500,000 maximum. The amounts of insurance available for contents coverage are: residential, $20,000 base plus an additional $80,000 for a $100,000 maximum; non-residential, $130,000 plus an additional $370,000 for a  maximum of $500,000.

 Rating

 Rating a flood policy under the Emergency Program is merely a matter of multiplying the separate amounts of insurance for a building and contents times the appropriate building and contents rates. The current Emergency Program rates (per $100 of insurance) for residential buildings and contents are, respectively, .68 and .79; for non-residential property the rates are .79 building and 1.58 contents.

 Rating under the regular program is more complex. If a community is in the regular program, rates depend on the building's qualification as "Pre-FIRM" or "Post-FIRM" construction.  Pre-FIRM construction is defined as construction or substantial improvement that started on or before December 31, 1974, or before the effective date of the initial Flood Insurance Rate Map (FIRM) of the community, whichever is later. Post-FIRM construction is that which started after December 31, 1974, or on or after the effective date of the community's initial FIRM, whichever is later.  Separate tables in the flood insurance manual provide rates for each type of construction.

 To the computed premium is added an expense constant, currently $50 (except for the preferred risk policy; see information that follows). The expense constant differs for residential condominium building association policies, and is based on the number of units. For a scheduled building policy, the expense constant is $45 per building. A Federal policy fee of $30 is added ($11 for a preferred risk policy; see following section). Again, this fee is different for the RCBAP and is based on the number of units. Payment of the full policy premium must be made at the time of application or renewal, unless the application is submitted for rating.

 Increased cost of compliance, or coverage for the consequential loss brought on by a flood plain management ordinance or law affecting the repair and reconstruction of a flood-damaged structure, is now mandatory (effective June 1, 1997) on all flood policies except for those in the Emergency Program or those insuring contents only. The limit of liability is $20,000 per building, with a premium not to exceed $75. Complete rating information is contained in the flood insurance manual.

 When a community does not comply with NFIP floodplain management as determined by FEMA, a $50 probation surcharge is applied to all policies, including preferred risk policies, issued on or after the probation surcharge effective date.

 Preferred Risk Policy

 The preferred risk policy (PRP) is a package policy offering coverage combinations for both building and contents at a fixed premium. Previously, it was available only to owners of one- to four-family residential buildings located in B, C, and X flood zones. Now, for new or renewal business written on or after May 1, 2004, the PRP can be used for combined building/contents coverage for nonresidential properties, and contents-only coverage for all occupancies. The building must be in a B, C, or X flood zone on the effective date of the policy and must qualify at each renewal (the policy term is one year).

 The maximum one- to four-family residential coverage combination is $250,000 building and $100,000 contents. Up to $100,000 contents-only coverage is the limit for other residential properties. Non-residential maximums are $500,000 building and $500,000 contents.

 This policy is not available in the Emergency Program or in special flood hazard areas. Condominium units, except for townhouse or rowhouse type buildings insured under the unit owner's name, detached, single-family dwelling insured under the unit owner's name, or contents-only coverage for tenants occupying one of these, are ineligible (however, increased cost of compliance coverage is not available for townhouse or rowhouse condominium units). Contents-only coverage is not available for contents located in basements.

 Replacement cost coverage applies if the building is the principal residence of the insured and the building coverage is at least 80 percent of the replacement cost of the building at the time of the loss, or the maximum coverage available under the NFIP.

 PRP eligibility is based on flood loss history. A dwelling is ineligible if there are: two loss payments, each more than $1,000; three or more loss payments, regardless of amount; two Federal disaster relief payments, each more than $1,000; three Federal disaster relief payments, regardless of amount; or one flood insurance claim payment and one flood disaster relief payment (including loans and grants), each more than $1,000. If, during a policy term, a risk fails to meet the eligibility requirements, it will be ineligible for the PRP and must be non-renewed or rewritten in the standard flood program.

 Rates for the PRP are substantially lower than those in the standard program. The Federal policy fee ($11) and increased cost of compliance ($1; deduct where property is not eligible for the coverage) are included in the premium, but not the $50 probation surcharge. Check the flood insurance manual for complete rates.

September 2004