First, federal law requires buildings located in FEMA-identified flood hazard areas to have NFIP flood insurance as a condition of receiving federal aid or loans from federally insured lenders. This means that if you plan to obtain, increase, extend or renew a federally insured loan – including a second mortgage, home equity loan or refinancing – for a property located in such a flood hazard area, you will need to show you have flood insurance. Second, Congress recently authorized a nationwide flood zone remapping effort that could greatly expand the number and size of these FEMA-identified flood hazard areas, with the result that many properties that do not currently need flood insurance may have to obtain it in the future or be shut out of any federally insured financing.
Background
- Congress created the NFIP in 1968 as an alternative to the federal government’s traditional methods of dealing with floods and flood damage: constructing levees and providing federal disaster assistance. Under the NFIP, FEMA makes federally backed flood insurance available to property owners and tenants in “participating communities” that have agreed to regulate the use of their flood-prone land in order to reduce future flood-related losses. NFIP insurance is available for any property in a participating community, regardless of flood zone, and is required for all properties located in a Special Flood Hazard Area (“SFHA”) and acquired using federally insured financing.
- FEMA has developed flood hazard data, identified flood risk zones and prepared official Flood Insurance Rate Maps (“FIRMs”) for most communities in the country through its flood mapping program. Once issued, FIRMs are used by participating communities to adopt and enforce floodplain management regulations, insurers to determine full-risk policy premium rates, and federally regulated or insured lenders and federal agencies to determine when flood insurance must be purchased as a condition of a loan or financial assistance.
- In July 2012, Congress enacted the Biggert-Waters Flood Insurance Reform Act, which authorized FIRM remapping to establish flood zones that more accurately reflect climate change impacts, and increased policy premium rates to bring them into line with actual flood risks. Biggert-Waters had required FEMA to phase out discounted premiums, with the result that certain policyholders – especially in higher-risk flood zones – experienced extremely steep premium increases in 2013 and early 2014.
- Public outcry over these increases intensified after Hurricane Sandy in October 2012 and led Congress to pass the Homeowner Flood Insurance Affordability Act (“HFIAA”) in March 2014. HFIAA repealed and modified Biggert-Waters to offer relief to policyholders.
The following key changes to the NFIP took effect for new policies and policy renewals beginning on April 1, 2015:
1) “Grandfathering” Restored.
- The NFIP has historically provided subsidies, in the form of
discounted policy rates, to encourage community and property owner
participation.
- Generally, subsidized policies have covered “pre-FIRM” properties (that is, properties with structures built before the effective date of the community’s first FIRM) that are in high-flood risk locations and would otherwise pay higher premium rates.
- In addition, the NFIP has protected properties that have been remapped into higher-risk flood zones from premium rate increases where the property owner (1) built in compliance with the FIRM in effect at the time of construction, or (2) has maintained continuous coverage since first obtaining NFIP flood insurance.
- Biggert-Waters had required FEMA to increase rates to phase out premium discounts for such “grandfathered” properties. HFIAA restored grandfathering, with the result that these properties will continue to be classified with other properties from their former, lower-risk flood zone, and to pay at a discounted rather than full-risk rate
- In addition, Biggert-Waters had authorized FEMA to increase a property’s NFIP policy premium rate upon a change in property ownership. HFIAA repealed FEMA’s authority to raise flood insurance rates at the time of property sale, and returned to allowing buyers to assume the seller’s current rate.
- As of April 1, 2015, a property that (1) has been “Newly Mapped”
into a SFHA by a FIRM revision and (2) meets certain loss requirements
will be allowed to pay a discounted first-year policy premium that is
identical to the premium for a Preferred Risk Policy (“PRP”) (the PRP is
a lower-cost policy available to owners and tenants of eligible
residential and non-residential buildings in minimal-risk and
moderate-risk flood zones):
- Properties newly mapped into an SFHA on or after April 1, 2015 are eligible if the applicant obtains coverage that is effective within 12 months of the FIRM revision date.
- Properties newly mapped into an SFHA between October 1, 2008 and March 31, 2015 are eligible if the applicant obtains coverage that is effective before April 1, 2016.
- After the first year, the “Newly Mapped” policy will transition to a full-risk rate through average premium increases not exceeding 18%. However (and notably), this full-risk rate may be based on a grandfathered flood zone and/or base flood elevation.
- Annual individual flood premium increases are now limited to a maximum of 18% for most policyholders (with average annual increases for each risk class limited to 15%).
- However, policy premiums for properties with historically subsidized policies – including business properties, non-primary residences, “severe repetitive loss” properties and “substantially damaged or improved” properties – are subject to an annual 25% increase (on a rate class basis, not an individual basis) until full-risk rates are achieved.
- It is a single-peril policy, covering only damage caused by “flood.”
- Subject to the policy limits, it pays only for direct physical damage to an insured property up to the actual cash value of the actual damages incurred or the policy limit of liability, whichever is less.
- If you do not already have a policy in place, there is a 30-day waiting period from the date of purchase (subject to certain exceptions) before a newly acquired policy goes into effect.
Source: www.masslawenvironmental.com