By Russ Lay on March 17, 2013
This comes on the heels of the 17-percent rate increase allowed by the state insurance commissioner on basic homeowners policies in many areas of Dare and Currituck counties.
Add to those the 5-percent surcharge on wind and hail coverage for owners participating in the so-called Beach Plan run by the state of North Carolina.
John DeBoy of the Outer Banks Homebuilders Association and Willo Kelly, government affairs officer for the homebuilders and the Outer Banks Board of Realtors, believe property owners need to be aware of these potentially expensive changes.
We sat down with them recently to discuss the changes and help owners navigate the alphabet-soup of acronyms surrounding insurance.
Kelly, perhaps the most knowledgeable person in Dare County on property insurance issues, began with a little history of the federally administered National Flood Insurance Program (NFIP).
Congress authorized the program in its current form in 1974. Private sector insurers were shying away from issuing policies in areas prone to flooding, which congressional leaders felt was retarding economic growth in those regions.
“Market rates” were to be set so that premiums paid into the program would cover damage claims.
The government mapped the entire country and rated flood risks through Federal Insurance Rate Maps (FIRM).
They established broad zones of “V,” subject to wave velocity damage; “A,” subject to a 1 percent annual chance of a flood event over a 100-year period; and eventually “X,” where flood events were spread over a 500-year period.
Subzones within each category further broke down flood risk.
According to DeBoy, 52 percent of the American population lives close to oceans, estuaries, rivers, creeks and even flood-prone valleys.
While mortgage lenders almost always require borrowers to buy flood insurance if the property is in a Special Flood Hazard Area (SFHA), properties without such loans are generally not covered.
It was estimated that as many as 70 percent of the properties in New York damaged by Hurricane Sandy lacked flood insurance. In many cases, those properties were not located in areas previously designated as SFHA’s.
To get the program started, Congress needed local communities to agree to participate and owners with existing properties to join. As a result, all structures built prior to the 1974 flood maps were offered steep discounts of 40 to 60 percent of their actual risk-rated premiums.
Those discounts, which the government refers to as “subsidies,” were grandfathered in such a way that the reduced premiums stayed in effect even when ownership changed hands.
Then, in 2005, claims from Hurricane Katrina exceeded the program’s ability to pay out, forcing the fund to borrow from the U.S. Treasury.
Congress debated a series of proposed reforms, including eliminating the program altogether. In 2012 the Biggert-Waters Flood Insurance Reform Act was passed and significant reforms were announced.
This year, rate increases are in store as the Act eliminates discounted premiums for those pre-FIRM properties.
On Jan. 1 of this year, so-called second homes, which include investment properties, built prior to 1974 will see rates rise about 25 percent a year until actuarial risk rates are achieved, including:
• Any residential property that is not the primary residence of an individual
• Any severe repetitive loss property
• Any property that has incurred flood-related damages that cumulatively exceed the fair market value of the property
• Any business property
• Any property that after the date of the Bill has incurred substantial damage or has experienced “substantial improvement exceeding 30 percent of the fair market value of the property
• Any new policy or lapsed policy, or any policy for a newly purchased property
• Any policy for which the owner has refused a FEMA mitigation offer under HMGP, or for a repetitive loss property or severe repetitive loss property.
Severe Repetitive Loss means four or more claims payments of over $5,000 or two
claims that exceed the value of the property.
If you don’t own a pre-FIRM property, don’t pop those champagne corks just yet.
In addition to the pre-FIRM phase-out, Kelly said, Congress has allocated FEMA, which administers the NFIP, $400 million to remap the entire country to create new maps for the FIRM ratings.
Using historical flood data since 1974 and far more accurate four-layer digital mapping techniques, existing pre- and post-FIRM properties may see their rates increase, sometimes substantially.
Three confusing factors will come into play when the new maps are released.
The first issue is “Base Flood Elevation” or BFE.
If you are in a flood zone, the flood insurance program would base your rates on how high your first-floor enclosed area was above the predicted base flood area.
For example, if the predicted base flood plain was 3 feet above sea level, homes built at 3 feet above BFE received standard rate. If your home was above BFE, discounts kicked in for each additional foot, and if your home was below BFE, your premiums were much higher.
With the new mapping, it is expected that the BFEs will change, for the worse in most cases, in many SFHAs.
Thus, without any changes to your property’s foundation elevation, you might see a rate increase. More accurate mapping might also indicate your original BFE was slightly off, and if a new BFE survey reveals that error — as can happen when you sell a property — rates could also change.
Kelly and DeBoy noted that many property owners, to gain maximum height, built structures right at the BFE in effect at the time of construction.
In the past, if your BFE changed over time, the property was grandfathered with premiums based on the BFE at the time of construction.
No more. Any change in BFE will result in a change in premiums each time FIRM maps are updated.
In addition, the new maps are also expected to change the current boundaries of the “A”, “V” and “X” zones.
This means properties currently in an “A” zone could be remapped into the more expensive “V” zone, while some “X” zone properties may now be located in “A” zones.
Finally, a new “Coastal A” zone has been proposed.
According to Karen Bachman at G.R. Little, insurance companies have been told the new zone will define a Limit of Moderate Wave Action (LiMWA) where the wave is between 1.5 and 3 feet.
Kelly says these zones will likely “drop in” behind current V-zones, which will affect properties between the highways along the oceanfront and could also include sound side properties where 1½ -foot wave action has been observed in past storms.
DeBoy brought along the new building code book for the proposed new zone, a tome thicker than the entire building code requirements of most towns.
Thus, in addition to higher flood premiums, construction costs in the new zone will be higher.
Kelly also sees a potential conflict in new construction if BFEs rise under the new maps.
It will be difficult for new homes forced by the BFE to be elevated higher on pilings to conform to many local height-restrictions.
North Carolina Sea Grant provided some examples in a press release dated December 14, 2012 of rate increases in pre-FIRM zones when combined with hypothetical changes in BFE.
BFE increases in an “A” zone by one foot would raise premiums on a $100,000 structure with $40,000 content coverage from $1,458 per year to $3,844.
In a V-zone, which is usually oceanfront/oceanfront proximate, the same 1-foot change would raise premiums from $3,478 to $4,670 annually. If the new maps raise BFE by 3 feet, the new premium could rise to over $10,000 depending on the coverage chosen by the owner.
Uncertainty pervades this subject.
No one knows when the new flood maps will be released, so changes in BFE, the boundaries of current flood zones and the new boundaries of the Coastal A zone are unknown for current owners and potential buyers.
Sea Grant also noted that in the past, the NFIP was restricted to rate increases of 10 percent a year. Now that figure has been increased to 20 percent if NFIP decides to increase rates across the board.
Also, rates were set on storm data reflecting current conditions. However, the Reform Act set up a special committee with a one-year mandate to explore other possibilities in the future, such as predicted sea-level rise or development patterns that could increase storm-water runoff in premium calculation.
Sea Grant notes this could significantly raise BFEs and may drastically affect riverine communities.
For now, Kelly and DeBoy suggest property owners currently covered by flood insurance stay in touch with their insurance agents.
Kelly also suggests owners in flood zones might want to obtain new BFEs from surveyors as a possible tool to use in seeking localized exceptions to the generally broad boundaries included in FIRMs.