Written by Kevin Reilly
The National Flood Insurance Program (NFIP) is about to undergo some major changes as a result of a piece of legislation called the Homeowner Flood Insurance Affordability Act (HFIAA) of 2014 (HFIAA). These changes take effect on April 1, 2015 and will impact most of us in Long Beach. When I talk to people about these changes and the costs associated with them I get the same comments over and over, “They can’t do that.” Or “They’ll never do that.” I’m sorry to say, but they can and they did. Oh, and it had nothing to do with Sandy.
First off, all flood insurance policies will receive a surcharge. The surcharge is a flat fee applied to all policies based on the occupancy type of the insured building and is not associated with the flood zone in which the building is located in. The fee will continue to be charged on all policies, including full-risk rated policies, until all Pre-FIRM subsidies are eliminated. FIRM stands for Flood Insurance Rate Map and a home is considered pre-FIRM if it was built before there was a flood map for the area. Because these homes were built before the flood maps they are granted a discounted (subsidized) rate. For primary residences (single-family and individual condominium units, including renters [contents-only policies]) the surcharge will be $25.00 per year. For Non-Primary residents and business that charge jumps up to $250.
Some Flood insurance companies have already sent out letters asking policy holders to verify their primary residence, other companies are sending out the request as part of the renewal paperwork. The letters are titled “Verification of Primary Residence Status” and they are mandated by FEMA for NFIP policy ratings.The purpose is to determine if the insured location is the primary residence, which qualifies for preferred rating. DO NOT ignore this letter, if you do, the residence is assumed to be a non-primary residency and subject to the higher rates. This is just a surcharge so it’s not technically part of the rate increase.
The NFIP will also be implementing an annual rate increases on pre-FIRM subsidized policies. The rate-increases will have limitations set by HFIAA for individual premiums and rate classes. The maximum increase you would see of an individual policy would be 18% of the premium but the average rate would be about 15% of premium. The rate increases will continue until the policy is paying the full-risk rate. No word on how that “full-risk rate” will be determined.
There is also something called the “Reserve Fund”. The legislation requires the establishment of a Reserve Fund to help cover costs when claims exceed the annual premium collected by the NFIP. Starting in April all policies will start contributing a fee to the Reserve Fund. Preferred Risk policies (residential and non-residential buildings located in moderate- to low-risk areas) will pay a fee of 10% of the premium and all others will pay 15%. This is a fee so it’s not considered part of your premium.
There are a few items in the legislation that are meant to help make the insurance more affordable, for example:
- FEMA will begin offering a $10,000 deductible option for one-to-four family residences, which results in a 40% reduction in premium but if you are required to carry flood insurance your lender typically must first approve it.
- Requires FEMA to offer monthly installment payments for premiums.
- Removes the requirement of purchasing flood insurance for detached structures that do not serve as a residence.
- Requires FEMA to consider flood mitigation activities that an owner or lessee has undertaken on a property, including differences in risk involved due to land use measures, flood-proofing.
- Codifies the pre-Biggert-Waters basement exception to assure that homeowners with flood-proofed basements receive credit when their flood insurance rates are calculated.
Needless to say our flood insurance policies and what they will cost us is about to get very complicated and costly. The changes I described above will take affect when your policy renews. n the meantime you can check with your insurance broker to see how the changes will affect your policy.