What You Need To Know About Flood Insurance Changes – Part 1

20131006-192636.jpgThere’s been a lot of news lately about floods. From the floods in Canada just a couple months ago, and to the more recent floods in Colorado, it seemed flooding was already at the front of many minds when news reports came out regarding the changes to flood insurance policies and premiums in the US.

We have friends that follow this type of news very closely, so we’ve known for a while that changes to flood insurance premiums and policies were a possibility in coming years. And before our most recent flood insurance renewal for our duplex we received a notice in the mail saying that subsidies on flood policies for investment properties would phase out beginning in 2013, and that subsidies for primary residences would phase out beginning in 2014.

I wasn’t really worried about any of this – particularly with our duplex property since we could technically close our HELOC on that property and not be forced to purchase flood insurance there. But some of the more recent news reports on the changes to the flood insurance program have been filled with some pretty extreme rhetoric…

“On this house, for $250K of insurance, the rate was going to be $45,663 and some odd cents per year. Well, you know, you can buy this house in five years of that.”

“[The Bill] seemed like a good idea at the time, and it was, but the way implementation is being proposed, it will indeed have a devastating impact … on all Floridians.”

“And it’s not just Florida. In New York, Massachusettes, Louisiana and even Iowa, homeowners and their elected officials are working to pressure Congress…”

“Some predict the new rates will lead to lower home values, depressed sales, and even a new round of foreclosures in some coastal communities.”

And these were quotes from the typically not-hyperbolic NPR. After reading this, I didn’t panic, but it did make me pause. “Maybe this was something that we actually did need to start preparing for…” I love our little house, but if our flood insurance premium was increasing to $10K+ per year (it’s currently ~$350), we’d have to do some serious consideration.

 

This is going to be a two-part post that will touch on these main items.

  1. Unravel the Flood Insurance Vocabulary – understanding what goes into setting flood insurance premiums in the US (the rest of this post)
  2. Why Were Some Policies Subsidized, but Not Anymore? – The original intent behind subsidies to some flood insurance policy holders and why that policy has changed. (next post)
  3. Is My Current Policy Subsidized? – How current policy holders can look up their locations and determine if their policies are subsidized. (next post)
  4. What’s My Future Risk? – For current policy holders and non-policy holders, how to look at FEMA’s maps and make informed decisions about your flood risk and need for flood insurance. (next post)

 

Step 1 – Unravel the Flood Insurance Vocabulary

Flood insurance in the U.S. is ridiculously complicated. I’m going to try and sift through what you you need to know to make some educated decisions, but it requires a little bit of alphabet soup to get there. Bear with me as I try and explain some of this essential (but often unknown) background.

First things first. Flood insurance is not just for property owners. Contents only policies are available for renters, though not required, and moreover landlords are not generally required by law to notify tenants if the building they are renting lies in a flood zone. Renters, this puts you at potential risk. A typical renter’s insurance policy does NOT cover flood insurance.

What’s “THE BILL”?

The big deal that’s going on is that in 2012 Congress passed the Biggert-Waters Flood Insurance Reform Act. Basically FEMA (Federal Emergency Management Agency) was broke after major payouts due to Hurricane Katrina and “Super Storm” Sandy. It had $24B in debt, and Congress decided that one of the best ways to fix this debt was to eliminate subsidies on flood insurance premiums run by NFIP (the National Flood Insurance Program).

Phase-outs on subsidies for flood insurance premiums began for investment and vacation homes on January 1, 2013, and for primary residences on October 1, 2013. Hence, all the news articles that profiled people freaking out at the end of September.

FIRMs and Market Rates

FEMA creates the FIRM (Flood Insurance Rate Map), basically maps that cover most of the country which describe what the likelihood of flooding is at a particular address. The benchmark is that if you are in a 100-year flood plain (ie there is a >1% chance of flooding in any particular year), you need to have flood insurance to have a mortgage. FEMA calls these 100-year flood plains SFHAs (Special Flood Hazard Areas) and uses the zone codes “A” and “V” to represent them on their maps.

Flood Zones, Alphabet Soup On The Map

When you look at the FIRM (remember it’s a map), you see areas with lots of different shadings that show you what the relative chance of flooding is in that area. These are called the rate zones, so your flood insurance premium ends up being based (at least in part) on what rate zone your structure is located in. The most common rate zones (and easy ways to remember what they mean are):

  • X = X-cellent, Low-moderate risk (zones B & C are also in this category)
  • A = A Hassle! Moderate-high risk, need elevation certificates (also expressed as AE, AO, AH, or AR with the second letter indicating what TYPE of flooding is most likely to occur in those areas)
  • V = Very high risk; usually for coastal areas (also expressed as VE)
  • D = Data missing, FEMA doesn’t have enough information to evaluate risk in this area

Zones A and V are the zones that are considered SFHAs. If you live in one of these your mortgage holder probably required you to have flood insurance. Though, if you are in an X, B, or C that doesn’t mean you should stop reading this series…

BFE, Not What Urban Dictionary Thinks

What I think of every time I say BFE…

Rate zones A and V are partly defined by a given BFE. Here, unlike in urban dictionary, BFE stands for the Base Flood Elevation. This is the reference elevation for that part of the map which helps determine what elevation the 1% flood zone is at. The BFE becomes your reference point, so what matters is how much above the BFE your structure is.

For coastal areas, like where we live, the BFE is typically 0. So what gets measured is absolute elevation rise from sea level. In the nearest floodplain to my parents’ house in a decidedly non-coastal area, the BFE is 2,456 feet. So if their house was located within that flood plain (instead of a short distance away), they’d care how many feet their house is above 2,456 feet in elevation.

Rate Zone Numbers

On the FIRM map, rate zones A and V are almost always followed by a number, 1-30. You’ll see it expressed like A# (ie A10, A17). This number (#) indicates the number that you need to add to the BFE in order to determine the minimum elevation for building in that zone.

BFE + # = minimum elevation of structure

For instance, we have property that is in an AE-10 zone. Since we are coastal and our BFE is 0, any structure built in this AE-10 zone needs to be 0+10 feet above sea level. This requirement is applied to the LOWEST part of your house, so any basement or cellar needs to be at an elevation above 10 feet. (This explains why there are so few basements and cellars where we live.)

Summary So Far

So here’s where we are so far.

FEMA creates the FIRM which establishes your BFE and your rate zone for a given location. Then the NFIP steps in and depending on the actual elevation of the structure on your property (or the one you are renting in) and the rate zones, establishes your flood insurance premium.

Had enough of the alphabet soup yet? Sorry, there’s one more…

The CRS Can Help

While most of your flood insurance premium is determined by your elevation, the rate zone, and the BFE, the CRS can also help. CRS (Community Rating System) is “a voluntary incentive program that recognizes and encourages community floodplain management activities”.

Through different community actions (including things like flood education, and community design to encourage drainage), your community can get assigned a CRS score on a 1-10 scale. The lower your community’s number on that scale, the higher the discount that community members get on their flood insurance premiums.

Not all communities participate, but here’s a list of all those that do and what discounts are available for each of those communities. Unsurprisingly it looks like most communities in Florida participate with varying CRS discounts.

 

I realize this was exceedingly long and complicated for a blog post, but I basically just summarized a large chunk of this book in language that (I hope!) was easy enough to understand. Because only once you understand the system is it easier to figure out if you’ll be affected by the changes and get an idea of what your risks are.

 

Any questions so far? Who out there has flood insurance or is wondering if they should?

25 comments to What You Need To Know About Flood Insurance Changes – Part 1

  • Wow, sounds complicated so far. So if a flood insurance company threatens to raise your rates to 25% of your house price, why can’t you get another quote from another insurance company. Clearly the first company didn’t have their math right, and if they did, you shouldn’t Live there to begin with.
    Cash Rebel recently posted..Would Give Directly work in the US?My Profile

    • Ahhh, the private flood insurance market is virtually non-existent. While there are different companies that “sell” flood insurance and administer claims, virtually all of the underlying policies are FEMA policies purchased through NFIP.

      As for the $45K premium guy, there are a lot of reasons that policies that used to be very cheap aren’t anymore, which the next post will talk about more. But this could also be the case where someone isn’t understanding their premium or the type of coverage they are being quoted on. Honestly, I thought it was pretty disingenuous of NPR to lead their story with this guy without providing more details.

  • Yikes! That sounds awful.

    I know that they change the flood maps in Indiana every so often as well. Fortunately, our town is higher than some of the surrounding towns for some reason so we haven’t had any problems here. But, several neighboring communities have problems occasionally.
    Holly@ClubThrifty recently posted..Cash Money: $6,350 in September Income and Blog UpdatesMy Profile

    • What about the town you’re moving to now? The next post will show you how to look that stuff up pretty easily since it’s not always intuitive and you can end up on the border of a floodplain pretty easily (then a later small map change might include your property).

  • Ironically, I just had a long talk with my insurance agent about flood insurance. From what he told me, unless you’re close to a moving water source (i.e, a river) you can pretty much be assured that regardless of whether or not you’ve purchased flood insurance, you won’t be covered for any flooding. Wonder if that’s true?
    Laurie @thefrugalfarmer recently posted..Starting Your Marriage on the Right Financial FootingMy Profile

    • I don’t know if what your insurance agent is saying is actually accurate. Perhaps it’s true in your area if he knows the flood plains well, but that’s not a generality that would extend across the whole country since there are many types of flooding – waves from wind force, tidal rise, puddling from rain due to soil that doesn’t absorb much water, or rain runoff from adjacent hills or mountains that have nothing to do with rivers… But the big thing is that the FEMA definition of a flood requires rising water that must cover at least 2 acres.

      What gets covered in the policies is another area where a lot of people often get confused. Anything finished in a basement would NOT be covered. Pretty much the only things in a basement that would be are things like water heaters or furnaces.

      • Interesting about the basement stuff – I did not know that! My guy was telling me that, for instance, puddling from rain due to lack of soil absorbing the water doesn’t count, because it’s our responsibility to have proper gutters, runoff spouts and whatever in place to bring the water away from the house. This is where I get confused about flood insurance, and so your info is huge, Mrs. PoP – thank you!
        Laurie @thefrugalfarmer recently posted..Starting Your Marriage on the Right Financial FootingMy Profile

  • This is great information, and I really appreciate you breaking it down in detail. I think my next step is to figure out which zone our home is in. I do know there used to be flooding back before the city built in our green zone/drainage basin. It’s probably a good idea to understand the risks we’re undertaking by not having flood insurance.
    Done by Forty recently posted..Notes from PeruMy Profile

    • The next post will have instructions on how to look everything up for your house =) It was just getting long, so we decided to break it up into two posts. =)

  • Debbie M

    I have flood insurance. When I bought this house I was wise enough to make sure it wasn’t in a 100-year flood plain, but I didn’t know you could actually look on a map.

    When you’re not in a 100-year floodplain, insurance is pretty cheap, and flooding can be extremely costly, so I got the insurance. (I learned this in high school from my mom who did some research after some neighbors six blocks away–and closer to a creek–found themselves with six feet of water in their house.)

    A few years ago I got a look at one of these maps and it turns out that the border of the nearest such floodplain is my back fence. And guess what’s on the other side of the fence? A huge asphalt parking lot around an apartment complex. I’m thinking those apartments are not likely to soak up a lot of water in the event of a flood, so I don’t feel safe, though at least I do get the cheaper insurance.

    Then this year I got the news that the flood maps in our area were being updated and I figured that the apartment complex may have been built since the last map was drawn and I’d be doomed. But then I got a look at a map that showed the old and new boundaries. The old boundary went through the apartment complex and the new boundary was exactly what I had remembered seeing several years ago. I don’t understand, but I’ll take good news where I can get it.

    And today I’ve learned from your link that my city is in class 6, so I get a 10% discount (and those in the 100-year floodplains get a 20% discount). I knew there were advantages to our flood-control efforts, but I didn’t know that one of them was a discount for my flood insurance and didn’t even know I had such a discount.

    Unfortunately, this sounds like the government is sacrificing long-term gains (from encouraging cities to try to prevent flooding) for short-term gains (not having to pay the subsidies). It would be better to maybe actually check out the flood prevention things and make sure they are actually good before extending these discounts. Reduce the discount by 1% to get the money to actually do these inspections.

    • Re – the concrete parking lot. It might matter, but might not. It’s weird, there are so many different types of flooding, puddling is more about the ground not being able to take any more saturation, whereas runoff is more about sudden bursts of water creating mini streams. This stuff gets insanely confusing.

      As for the long term/short term gains – the CRS discounts aren’t going away. According to FEMA, those are discounts, not subsidies. (Weird, right?) The difference between them, at least according to the CBO is that a CRS discounted policy is still technically a market rate. (And actuaraly sound.) It’s just adjusted to account for the preventative measures your community has taken that makes structures in your area, though perhaps not your area as a whole less flood prone. Think of it this way, the rate zones get set based on the topology (and geography and development of an area) but they’re taken from “mile high” observations. Then the CRS lets communities step in and say, “Yes we have these inherent flood risks and that’s why we’ve done X, Y, and Z to help mitigate them and encourage the flow of water away from existing structures.” Does that make sense?

      Subsidies are a whole other ball game, and the next post will talk more about them. They’re pretty politically sticky and are more about whether or not the structure (as it stands) conforms to current building/flood plain codes… think of some of the older homes on beaches that are just a couple of feet off the ground… those were most likely getting subsidies and their rates were never market rates.

  • I haven’t really bothered to deal with contents only flood insurance for any of the places that I’ve rented. They’ve always been above the 1st floor or if they were on the first floor, the building itself was on a rather large hill. Now what I am curious is if a sprinkler went off and flooded everything, could the insurance company try to cop out and say it’s flood damage and it’s not covered. It would be a really rare possibility but I’m curious.
    Micro recently posted..September 2013 Mission BriefingMy Profile

    • Um… since the FEMA definition of a flood requires water to be rising, flood insurance shouldn’t cover sprinkler damage (where by defn the water is coming from the ceiling). But whether or not it’s covered in your other policy I have no idea…

  • Definitely not an easy one to follow. We’re actually at my in-laws right now, who live in Pensacola, FL, and my father in law was just telling me that their insurance company just tried to jack their flood insurance rates from $600 a year to $6,000. Crazy! Luckily for him he has a friend who helped him fight it and got the same rate secured at least for this year, but it’s a little scary to think what the future might hold.
    Matt Becker recently posted..Staying Safe With DIY Car RepairsMy Profile

    • Wow – are your in-laws right on the beach or something?. I wonder how your FIL managed to get it decreased at least for this year. If you’re still there on Friday, maybe you can look up the rate zones for his address and see what you can find out.
      Supposedly Biggert-Waters requires phase-in of new pricing over 5 years, so I wonder what happened that made his policy jump so rapidly rather than easing into it over 5 years?

  • I recently did a post saying that rental property wasn’t replacement cost and that instead it is actual cash value. Luckily both my home and my rental are in zone X.
    Lance @ Money Life and More recently posted..How Much Money Is Enough Money?My Profile

  • Our building’s basement (we own a condo on the 3rd floor) flooded severely during Sandy. Unfortunately there is a basement unit and the owners of that unit had to basically tear down their whole apartment (walls, wood floors, kitchen cabinets, bathroom cabinets, everything). Because their apartment flooded previously during another hurricane they are not not eligible for insurance at all (not just flood, but any insurance). I know they are terrified because if anything happens to their unit they aren’t covered. I don’t know how much debt they are in because of all of this, but I suspect they are drowning in debt literally and figuratively
    KK @ Student Debt Survivor recently posted..September Goal Progress & Income UpdatesMy Profile

  • It says there is no map for my area! I would have never even considered flood insurance until the recent floods in Colorado. I still don’t think we’re in a risky area. There are no moving bodies of water nearby and we are not backed up to any sort of hillside. We are actually one of the higher spots in our neighborhood, which is why we shelled out for a lightning rod, so hopefully we’re safe from flooding.
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  • Sad to know that some of the provinces here in the Philippines don’t have any idea about flood insurance. Last week the tragic came in one of the smaller province here and almost 90% were affected by the flood. And the home owners were so depressed about what they will do to their affected houses.
    Clarrise @ Make Money Your Way recently posted..Making money because people know youMy Profile

  • […] we asked if we should close the HELOC, my view on it has changed. Sure we buy flood insurance on our duplex when we have it open and probably wouldn’t otherwise. That’s a cost of […]

  • As a land surveyor who lives and works in a flood plain, I am happy to see people educating themselves on these issues. I’ve seen too many people get overwhelmed by flood insurance requirements and I try to educate them hoping they will pass this knowledge on to their friends and neighbors. Great article.