Thursday, June 01, 2006

FEMA Flood Insurance - Extreme Makeover

Well, the issue of hurricanes hitting Long Island and the New York metropolitan area continues to make big news. There was another big article in today's Newsday talking about storm preparedness, and I just got an invite today to a big conference at the New York Hilton on July 19. Called the Northeast Hurricane Conference, they hope to bring together all the various parties - government, insurance, emergency personnel, and so on. The idea will be to try to get information out to everybody, including us everyday folks.

Meanwhile, in Washington D.C., both houses of Congress have passed different versions of a major FEMA Flood Insurance reform act. Now of course they need to have a conference committee to iron out differences, but there are going to be some major changes in the Federal Flood Insurance program (NFIP).

It will be no surprise to most folks, I'm sure, to find out that Katrina bankrupted the FEMA flood insurance program. It required an infusion from the U.S. Treasury of $23 billion (so far). And although Long Island gets great benefits from the program, I'm sure you can understand that the folks in places like Arizona and New Mexico feel that those who live in flood areas should pay for their own claims through the FEMA program, not be subsidized by those not in flood areas.

There are two fundamental ways to financially beef up the flood insurance system so it's better prepared for the inevitable future claims. You can get more money in, and pay less money out. So some changes will be designed to get more people to participate in the program through changes to the flood zone maps and through requirements in federally backed mortgages (which means most loans.) In other words, more people will be getting letters from their bank advising that they need flood insurance. The second part of the 'more money in' equation is higher rates, unfortunately.

On the 'less money out' side, we might see more restrictions of coverage on buildings that have had multiple losses in the past, less available coverage for vacation and second homes, enforcement of penalty clauses for underinsurance, and other possibilities.

I stress that these are all possibilities at this point, though most of them are in one or the other of the bills already passed by Congress. The only real question is exactly what form the final bill will take. There is no question that action will be taken on some bill.

Next time, we'll talk a little about Excess Flood Insurance, over and above the $250,000 maximum available under the FEMA program. That's going to be another big issue as banks wake up to the fact that many many homes on Long Island and in New York would cost many times that much to re-build after a flood.

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