April 15, 2014

Hatteras Island Real Estate:
National Flood Insurance Program update


On March 21, President Obama signed into law H.R. 3370 – the Homeowner Flood Insurance Affordability Act.  This law amended several provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) which made major changes to the rate and premium structure of the National Flood Insurance Program (NFIP).

To refresh your memory, in July 2012, Congress and the President approved the Biggert-Waters Flood Insurance Reform Act of 2012.  The purpose of this legislation was to put the NFIP on solid financial footing by increasing inadequate flood insurance premium rates until they reflected the true actuarial risk associated with the properties that were being insured.

The National Flood Insurance Program had accumulated a deficit of about $24 billion resulting from losses exceeding premium income due largely to claim payments related to hurricanes Katrina in 2005 and Sandy in 2012. While well-intended, the Biggert-Waters legislation was poorly drafted, resulting in increases in flood insurance premiums that were so large that they could have caused some policyholders to lose their homes.

After the legislation was enacted and after legislators began hearing from their constituents about the potential financial impact of the changes, bills were introduced in both the Senate and in the House of Representatives to delay some flood insurance rate increases until the Federal Emergency Management Agency (FEMA) completed a study on the affordability of the new rates and proposed solutions to situations involving the most severe increases. The result of these legislative actions was the passage of H.R. 3370 – the Homeowner Flood Insurance Affordability Act which the President signed into law last month.

Here are the highlights of H.R. 3370:

  • Reinstates grandfathering on ALL post-FIRM properties – those that were built to a Flood Insurance Rate Map standard. This includes all post-FIRM primary resident policyholders, second home policyholders, and non-resident policyholders.  A policyholder and any subsequent owner of property built in a flood zone will be allowed to continue to pay premiums based on the flood zone and base flood elevation in place at time of construction. The Flood Insurance Rate Map (FIRM) date for Dare County is 1978 but the exact date may vary by town. (The date that distinguishes pre-FIRM from post-FIRM properties on Hatteras Island is October 6, 1978, and for Hyde County, it is January 1, 1975.) This should make things "business as usual" for these properties given the fact that FEMA never implemented the provision of the Bigger-Waters Flood Insurance Reform Act of 2012 that removed grandfathering from these properties.
  • Pre-FIRM primary resident policyholder rates may increase between 5 and 18 percent a year.
  • Pre-FIRM second homes: Owners of these properties will continue to see a 25 percent annual rate increase until actuarial risk rates are achieved. This remains unchanged from BW-12. However, buyers of these properties will now be allowed to assume the flood insurance policy rather than having to pay the full risk rate at time of purchase.
  • Pre-FIRM commercial properties and severe repetitive loss properties will also continue to see a 25 annual rate increase until actuarial risk rates are achieved. This remains unchanged from BW-12. However, buyers of these properties will now be allowed to assume the flood insurance policy rather than having to pay the full risk rate at time of purchase.
  • Lowers the annual average rate increase cap from 20 percent to 15 percent. However, the individual policy rate increase is capped at 18 percent.
  • Allows for residential deductibles up to and including $10,000.
  • Excludes detached structures that do not serve as a residence from the mandatory flood insurance purchase requirement.
  • Restores the threshold for substantial improvements from 30 percent back to 50 percent of market value.
  • Requires FEMA to offer monthly installment payments for premiums.
  • Refunds any premium paid by property owners after the passage of Biggert-Waters (July 6, 2012) that was in excess of the 18-25 percent rate limit increases. This provision may take up to 18 months to be implemented by FEMA.
  • Imposes a $25 annual surcharge on all new or renewed primary resident policies and a $250 annual surcharge on all non-residential and second-home policies. Premium surcharges will be deposited in a Reserve Fund.

With regards to any rate structure changes needed, such as establishing new rates for higher deductibles, FEMA has from 8 to 18 months to implement these provisions. FEMA's fiscal year is Oct. 1 to Sept. 30. Therefore, annual rate changes become effective Oct. 1.

For more information, the National Association of Realtors has published an Issue Brief and Section by Section Summary of the new law: http://www.ksefocus.com/billdatabase/clientfiles/172/4/1983.pdf.

In addition, a short video was distributed by the Outer Banks Association of Realtors, the Outer Banks Home Builders Association, and NC 20 regarding the highlights of the Homeowner Flood Insurance Affordability Act: http://youtu.be/7ursb8MX9Pw.

As a footnote to the two pieces of legislation discussed in this article, there is a third issue which could potentially impact flood insurance rates. This factor is the upcoming changes in the Dare County and Hyde County Flood Insurance Rate Maps. As I understand it, the preliminary version of the new maps should be available for review toward the end of this year with the final maps taking effect in 2015 for both counties. 

Early reports indicate that there may be a significant decrease in the number of properties in Dare County that will be located in flood zones that are required to have flood insurance when the property is covered by a mortgage. We won’t really know anything for sure until the final maps take effect, and the initial reports do not say anything about the effect on an individual property.

The NFIP legislation is complex. Therefore, you should consult with your personal insurance agent to determine the impact, if any, of the original Biggert-Waters law and H.R. 3370 on your specific situation.

(The legislative summary was reprinted with permission from the Outer Banks Association of Realtors. NC-20 is a partnership of the 20 coastal counties in North Carolina dedicated to economic development of the member counties.)

(Tom Hranicka is an associate broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Tom Hranicka at P.O. Box 237, Avon, NC  27915, or e-mail to [email protected] )
Copyright 2014 Tom & Louise Hranicka.  All rights reserved.

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