Richard W. Shepherd
Loyola University Chicago School of Law, JD 2019
In 2016, Congress introduced a bill to reform the National Flood Insurance Program. Proponents of the bill saw it as necessary reform to a debt-ridden and ineffective program, while opponents saw it as an attack against a necessary safeguard for coastal Americans. The National Flood Insurance Program was set to expire at the end of September 2017, until Congress extended the program through December 8, 2017. As Americans rebuild from Hurricanes Harvey and Irma, Congress contemplates reform and seeks to keep the program funded past December.
The National Flood Insurance Program
The National Flood Insurance Program (NFIP) was established by the National Flood Insurance Act of 1968 (NFIA, 42 U.S.C. §4001 et seq.). The program was most recently updated in 2012 under the Biggert-Waters Flood Insurance Reform Act.
The NFIP was established both to subsidize flood insurance on properties with significant flood risk and to reduce flood risk through the adoption of floodplain management standards. Communities that participate in the program have access to federal flood insurance, and in return they must comply with federal minimum standards.
The Federal Emergency Management Agency (FEMA) maintains a process called Risk MAP, which produces Flood Insurance Rate Maps (FIRMs). FIRMs designate Special Flood Hazard Areas (SFHAs). SFHAs are areas which are exposed to a 1% or greater risk of annual flooding. Participating communities are required to adopt flood maps and regulate development in the SFHAs. Communities with higher standards of compliance enjoy reduced premium rates on flood insurance through the Community Ratings System.
The NFIP offers various flood insurance policies, with maximum coverage limits set by law. The current coverage limits are $250,000 for a residential building, and $500,000 for a commercial building or residential property for five or more families. Any federal agency which originates, guarantees, or purchases mortgages must require the property owner to purchase flood insurance. Further, federally regulated lenders must comply with the NFIP. Before originating a loan secured by a residential, nonresidential, or mobile home, the lender must determine whether or not the structure is located in a SFHA and if flood insurance is available under the federal program. Lenders must document the flood determination using FEMA’s Standard Flood Hazard Determination Form (SFHDF) and maintain the form through the life of the loan. If the structure securing the loan is located in a SFHA, the lender must notify the borrower of the flood insurance requirement. The borrower must sign the notice and purchase flood insurance. If the borrower does not respond within 45 days, or is unwilling to purchase coverage, the lender must force-place an insurance policy on the property. If at any time during the life of the loan the property is uninsured, or if the coverage is less than the required minimums, the lender must force-place coverage.
As of August 2016, there were 5 million flood insurance policies in-place under the federal program. Congress has authorized the NFIP to borrow $30.425 billion, and the program is currently $24.6 billion in debt. If the program is not renewed by Congress by the end of December, the borrowing authority will drop to $1 billion. Further, the NFIP would lose the authority to provide new insurance contracts, and policies in-place would expire after a year.
The devastation of Hurricanes Harvey and Irma add urgency to an effort to reform the NFIP, which had largely stalled in Congress. The reform efforts centered around modernizing the program and moving the insurance policies towards private insurers.
The NFIP had mostly remained solvent until Hurricanes Katrina and Rita in 2005, and Superstorm Sandy in 2012, left the program $24.6 billion in debt. By 2015, the Republican-controlled House Financial Services Committee (HFSC) began writing new legislation to reform the NFIP. In March 2016, the HFSC approved the Flood Insurance Market Parity and Modernization Act, in a unanimous bipartisan vote. The legislation would offer private flood insurance policies alongside the federally-subsidized policies currently available under the NFIP. Democratic support was withheld from the bill until certain consumer protections, such as disclosures regarding coverage limits and deductibles, were included. Despite bipartisan support, the bill never went further than committee approval.
In May 2017, Representative Blaine Luetkemeyer (R-Mo) introduced the Taxpayer Exposure Mitigation Act, which includes severe modifications to the NFIP. Under the proposed bill, the NFIP must send a portion of the riskiest flood insurance policies to private insurers, commercial loans would be exempt from mandatory coverage, and state and local governments would be allowed to submit their own flood maps, replacing the FEMA-produced FIRMs. The bill passed the HFSC along party lines, but never went further than committee approval.
In addition to Congress’s proposed reforms, the 2018 budget proposed by President Donald Trump eliminates FEMA’s flood mapping program and forecasts a further $8.9 billion in cuts to the NFIP.
An uncertain future
Until the damage of Hurricanes Harvey and Irma is fully understood, it’s difficult to total the cost. AccuWeather estimates $290 billion combined damage for both disasters. The NFIP expects $11 billion in insurance payouts in Texas, and it’s uncertain whether the NFIP will provide enough relief. In 2017, there were 119,000 flood insurance policies in place for Harris County, home to Houston, Texas. This is an 11% drop from the 133,000 policies in place in 2012. The drop can be partially attributed to the 8% increase in premiums over that time, which currently average $555 a year. For homes inside a SFHA, the premiums can be as high as $2,000 a year. The trend extends beyond Harris County to the greater-Houston area. An estimated 80% of properties in the Houston-area lack flood insurance coverage. With premiums too high for many Americans to afford, they are taking the risk to live without flood insurance.
The combination of the expiring NFIP, uninsured homeowners, and a stalled reform effort creates extreme urgency for Congress to pass a long-term solution. Congress passed a short-term NFIP extension tied to a $15.25 billion relief package. It’s uncertain whether the relief package will be enough, or whether Congress can agree on reform legislation. What is certain is that a program which is too expensive for most homeowners to afford, and too costly for the government to operate without significant debt, is in need of reform.