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Come on down! Massive discounts on flood insurance! (Sale ends when Congress acts)

 

As the relatively uneventful 2010 hurricane season winds down, Federal Emergency Management Agency (FEMA) officials -- those who run the National Flood Insurance Program (NFIP) -- can begin to breathe a sigh of relief. Like the little Dutch boy who put his finger in the dike, they have once again dodged disaster.

flood insuranceNo one, not even FEMA Administrator W. Craig Fugate, can tell you that the federal flood insurance program is properly run. At best, it is a heartbeat away from a massive federal subsidy. Earlier this year it was a hefty $19 billion in debt, barely able to pay its interest and, Fugate says, with only $2 billion in additional borrowing capacity. Another hurricane like 2005's Katrina could have washed NFIP away.

That’s because flood insurance is – effectively – a government subsidy. The NFIP provides residential structure coverage up to a $250,000 limit, along with $100,000 for contents, and its cost can be less than 50 cents a day, according to the National Flood Insurance Guide. The money it brings in through premiums is nowhere near enough to cover claims. It’s available to anyone, even to homeowners whose houses have been repeatedly washed away. The same property insurance agents who market regular home insurance policies often sell flood insurance and, if not, you can find a local representative through the NFIP’s Floodsmart.gov Web site.

Flood insurance broken

This government’s largesse has a price, however. "The NFIP is broken and needs serious change," says Loretta Worters, vice president of the Insurance Information Institute. "It has cost taxpayers billions of dollars despite promises that it would be self-sustaining, it has subsidized high-risk coastal development and it needs to have sound rates."

While the National Flood Insurance Program survives, it is a crippled but well-meaning parody of what flood insurance should be. For starters, it insures the wrong people:

  • Gulf Coast millionaires with oceanfront properties built on sand or near marsh lands whose mansions not only destroy protective ecological barriers but are almost certain to be washed away in a major storm. A Congressional Budget Office study in 2008 found that nearly a quarter of the coastal properties subsidized by the NFIP program were vacation homes.
  • Repeat offenders who collect each time the Mississippi River rises and floods their houses. Over time, they collect as much as 10 times the value of these homes, according to a review of FEMA records since 1978 published in August 2010 by USA Today. In fact, the owner of a $153,000 Alabama home collected $2.3 million in claims.
  • California desert-dwellers forced to buy flood insurance because of arcane FEMA maps that showed them in a flood zone. According to an NBC “Fleecing of America” segment in March 2010, it took months for residents of one South Los Angeles area to get a FEMA engineer to admit his flood maps were faulty.

Congress compounds NFIP’s woes

It’s doubtful that NFIP could dig its way out of its financial hole by simply adding customers. What the flood insurance program needs is "forgiveness" -- in other words, for Congress to forgive its $19 billion debt and let it start over, as a 2007 Senate bill suggested. The bill went nowhere. Even if it had, another Katrina-level disaster would put flood insurance back under water.

But instead of fixing NFIP’s problems, Congress could add to its woes. In July 2010, the House passed a bill sponsored by Calif. Rep. Maxine Waters to increase flood insurance coverage limits, add coverage for “additional living expenses” for those forced out of their homes, and add business interruption coverage when stores and factories are forced to shut down during a flood. Rep. Gene Taylor of Mississippi, who lost his own home during Katrina, wanted the program to add wind coverage (he is now out of office).

Neither of these bills has made it to President Obama's desk yet, perhaps because of concern about adding to the annual trillion-dollar deficit. Meanwhile, the NFIP program has been extended for one year to September 2011.

A good deal for some

There are good reasons for buying flood insurance, particularly if you are a homeowner living in one of this country's low-lying areas in Florida, Texas and Mississippi. After all, home insurance does not cover flooding. If your home is at risk, it’s wise to carry flood insurance. "The Gulf Coast states benefit disproportionately from the below-market rates of the NFIP," said a report issued earlier this year by the Institute for Policy Integrity, an advocacy group run out of the New York University School of Law.

There may be no major home insurance company willing to write a basic flood insurance policy that’s not backed by the NFIP, although some write what are called "excess" policies to protect a home from flood damage that exceeds the maximum federal limits. The reason home insurance companies won't write this coverage: It's too risky. Flooding is the nation’s No. 1 natural disaster, according to the National Oceanic and Atmospheric Administration (NOAA). It’s more common than tornadoes, earthquakes and fires. There have been nearly $24 billion in U.S. flood losses over the last 10 years and there is a 26 percent chance of flooding in a high-risk area during the life of a 30-year mortgage.

National catastrophe fund

One solution, originally proposed by then Allstate CEO Ed Liddy in 2005 when his company lost $5 billion due to Katrina and its sister hurricanes, is a national catastrophe fund. Insurance companies would handle the first level of any disaster and then rely on the federal government for costs exceeding a certain level. The United States already has such a plan in place to handle massive terrorist attacks like the World Trade Center, but has nothing for hurricanes or earthquakes except disaster loans which, as FEMA will tell you, need to be paid back.

So what does this mean for the average homeowner? Since flood insurance is underpriced compared to other types of coverage, it makes sense to buy it if you live in a high-risk area. In fact, if you’ve already been flooded, it makes sense to buy it even if the price increases. But according to the Insurance Information Institute, only 17 percent of Americans take advantage of flood insurance through the NFIP, and most live in the least affected area -- the Northeast.

So if you’re considering buying flood insurance, now is a good time. Congress has already let the program lapse four times in recent years, during which old policies remained in effect but new ones could not be written. If you’re looking for a great insurance bargain, it's a good idea to get grandfathered into the system before Congress corrects the balance sheet.

More from Ed Leefeldt here

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