Saturday, May 06, 2006

Flood Insurance Facts and Myths

This week we will take a little break from our discussion of the Long Island homeowners insurance crisis, and talk a bit about the other type of coverage that is very important if a hurricane hits Long Island, flood insurance. Standard insurance companies long ago decided that they could not provide coverage for flood because it is catastrophic in nature, in other words, it can cause large amounts of damage to large numbers of property all at once.

The big insurance carriers are not afraid of a fire, which might affect two or three homes, or a large building. But a flood that wipes out the entire South Shore of Long Island could put all the insurance companies out of business, as losses could easily reach hundreds of billions of dollars.

So about 40 years ago the Federal Emergency Management Agency (FEMA) was charged with designing a program for flood insurance. That was the beginning of the National Flood Insurance Program (NFIP). The idea was that loss payments would be guaranteed by the Federal flood insurance program but would be sold and serviced by both the NFIP itself and other insurance carriers who would be paid a fee for each policy they administer. Coverage is sold through local agents who choose to participate.

Communities were invited to join the NFIP flood insurance program in the late 1960's/early 1970's. As part of the requirements for joining, they had to agree to various changes in their building codes so that homes built after the date they came in to the program would be elevated beyond the 100 year flood plain level, meaning they would be much less likely to be damaged in a flood unless it was a really bad one. In return, those homes in flood hazard areas which are properly elevated get a much lower rate for their flood insurance.

All land areas are divided into flood insurance zones based on the ground elevation where they are. Naturally, the general tendency is that as you move away from the water, the hazard drops. However, it has been estimated by a number of experts that if a category 3 or better hurricane, such as Katrina, were to make a direct hit on Long Island, the water would reach Sunrise Highway in most areas, because the ground doesn't really start to rise until a few miles in.

The good news is that most homes more than a few blocks from the water are in what's called non-flood hazard areas, and flood insurance is pretty cheap for them. But near the water, and even moreso over on the barrier islands (where houses are not really damaged by floods as much as they are completely swept away) flood coverage can be fairly expensive. Our office writes a fair number of flood insurance policies for people on Gilgo Beach, Oak Beach, and Fire Island, and each one is individually rated by the flood insurance carriers based on location, elevation, and more.

Many people were required to buy flood insurance for the first time only in the past few years. As the mortgage refinancing and home equity loan boom happened over the past 5-7 years, with many homes being sold and many more seeing their equity taken out in the form of home equity loans and lines of credit, people learned something interesting about flood insurance. Since it's a federal government program, and the federal government also guarantees mortgages through the Federal National Mortgage Agency (FNMA or Fannie Mae) and GNMA (Ginny Mae), they also REQUIRE the purchase of federal flood insurance for homes in flood hazard areas. This puts more money into the National Flood Insurance Program through increased participation.

More to come in our next post.