How to Stay Afloat Among Shifting Flood Maps and Rising Flood Insurance Rates

Did you know we all live in a flood zone? Yes, a flood can occur anywhere, anytime. Our recent unpredictable weather and storm patterns, together with increased land surface development, fires, erosion, and inadequate drainage systems can all bring this danger close to home. Flood insurance is not just for coastal communities, and prudent property owners would be well-advised to navigate the changing tides of the flood insurance industry.

Of course, the risk of flooding varies in areas throughout the country, and this risk can change over time. The Federal Emergency Management Agency (FEMA) considers a “flood” to occur when two or more acres of dry land or two or more properties are inundated by water or mudflow. FEMA hasrecently completed a nation-wide project, called Map Modernization, which updated and digitized the country’s flood insurance rate maps (FIRMS). Georgia has cooperated with FEMA to complete digital FIRMS (DFIRMS) for all Georgia counties. FIRMS categorize properties according to their flood risk, and provide a basis for insurance companies to rate the flood risk and set insurance premiums for a specific locale. Properties are categorized on FIRMS as follows:

• High Risk Area, or Special Flood Hazard Area (SFHA). Also called the “100 year flood zone” or sometimes referred to as the “floodplain,” these properties have a 1 percent chance of flooding in any year and a 26 percent chance of flooding over the life of a 30-year mortgage. Their labels on the maps contain the letters A or V.

• Moderate to Low Risk Area. These properties have a determined flood risk, although reduced, and their labels on the maps contain the letters B, C, X or shaded X.

• Undetermined Risk Area. These are properties where floods are possible, but the flood hazards have not been analyzed or determined. They are labeled D Zones.

In recognition of our quickly changing environment, FEMA and the Georgia Department of Natural Resources (DNR) are currently engaged in another process of creating newer maps which provide even more accurate and complete flood hazard data. This data will help communities anticipate flood risks and reduce losses in the event of a disaster. These newest Georgia maps are being prepared for the watersheds and coastal areas in Georgia through the “Risk M.A.P.” program. As a Risk Map is completed, it is deemed preliminary, and after it goes through a public approval process, it is effective for that area. At this time, Risk Maps are effective for the counties in the Upper Chattahoochee River Basin, and maps  are in various stages of planning, production and approval for several other watershed and coastal areas in Georgia. Communities in Georgia, and around the country, are legitimately concerned that the new maps will change the flood categories by enlarging the SFHAs, which will create additional flood insurance and construction requirements for the affected properties. On the flip side, many communities are hopeful that the SFHA areas will be reduced by the new maps, releasing certain areas from insurance and governmental regulations. Further complicating the situation is the recent national legislation, discussed below, that implements a phased increase in flood insurance premiums for many types of properties.

Property owners should determine the flood zone category of their property and then determine whether to purchase flood insurance. An owner should be aware that the standard homeowner’s coverage does not include flood protection or coverage for floodrelated damage. FEMA’s National Flood Insurance Program (NFIP) offers specific federally-backed flood insurance, which is sold and serviced through private insurance companies. NFIP insurance is available to property owners in communities that participate in the NFIP program of floodplain management, and most communities with a known flood problem are participants. Owners should contact insurance agents who sell homeowner’s policies to obtain information about, or to purchase, flood insurance. Further, under NFIP rules, all federally regulated or insured lenders must require the purchase of flood insurance for loans on properties located in a high flood risk area. An owner of property in an SFHA without a loan does not have to purchase flood insurance, but should certainly consider purchasing insurance for adequate protection. For moderate or low risk properties, under NFIP rules, flood insurance is optional for federally insured or regulated loans, however individual lenders still have the option to require insurance for these properties. According to NFIP, over 20% of flood claims to NFIP come from moderate to low risk areas, and these areas receive one-third of flood disaster assistance. So, owners of these properties should consider purchasing flood insurance, and should discuss the issue with their insurance agents.

How do all the flood map changes in Georgia practically affect the purchase of flood insurance? If a property is changed from moderate or low flood risk, to high risk, mortgage holders will be required to purchase flood insurance on the property, but NFIP does offer extension and “grandfathering” rate options to save premium costs. If insurance for these properties is not purchased within 45 days of notification from the lender, the lender can force place a policy at a higher rate and charge the owner. If the opposite occurs and a property is changed from high risk to moderate or low risk, then insurance is not required but is recommended, and an existing policy may be converted to a lower cost Preferred Risk Policy. There are many other rating options for changed properties, which may depend on the elevation of improvements, the date initial insurance was purchased, insurance lapses, construction compliance, and more. An insurance agent should be consulted to find the best rate among the options.

What if an owner disagrees with a new map change or with a lender’s requirement to purchase flood insurance? If an owner feels that his property has been incorrectly changed to an SFHA on a new map, he can submit property and elevation data to FEMA and request a Letter of Map Amendment (LOMA), which if granted, will amend the current effective map to establish that this specific property is not located in the SFHA. Also, a borrower can challenge his lender’s requirement for flood insurance by going to FEMA and requesting a Letter of Determination Review (LODR). This should be an option after negotiations with the lender have failed. The LODR does not result in an amendment or revision to the flood map; it only upholds or overturns the lender’s determination. There are other specific ways to challenge a flood zone determination, and a professional should be consulted before implementing any appeal.

Finally, the entire flood insurance industry has been affected by recent federal legislation, the Flood Insurance Reform Act of 2012, or the Biggert Waters Act. With the creation of NFIP, flood insurance became available at artificially low, subsidized rates. The increase in recent years of flood-related disasters has resulted in large financial losses to NFIP and the low premium rates could no longer be sustained. Biggert Waters aimed at financial stability for NFIP by phasing out the subsidies, raising flood insurance rates for certain types of property, and triggering rate changes when new maps are adopted, policies lapse, or repetitive losses occur. Under this law, flood insurance premiums will increase in phases from January 2012 until they reflect the true flood risk of the property. The rate increases, which can be as much as a 25% increase, will continue phasing in through 2013 and 2014. However, there is now opposition to the reality of the Biggert Waters changes, and the current Congress is considering several bills aimed at delaying or reexamining the changes. In June 2013, the House of Representatives passed a bill proposing an amendment to Biggert Waters which would delay many of the phased increases in flood insurance premiums and provide time for FEMA to reexamine the upcoming changes. At this date, the amendment is in the Senate for consideration. Therefore, despite Biggert Waters, the industry is currently uncertain whether flood insurance rates will ebb or flow.

As the rain continues to fall in Georgia, property owners and real estate professionals should not hesitate to sail into the uncharted waters of flood insurance. This effort may prevent you from slipping down the drain of financial loss.

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