Flood insurance comes with new rates, rules
Many landowners face rising rates for flood insurance under a federal law calling for conversion to risk-based rates.
MOUNT VERNON, Wash. — Skagit County farmer Todd Frankenfield recently found himself on the unpleasant end of dramatic changes in federal flood insurance.
“It’s another government deal just rammed down our throats,” he said.
Landowners across the country face higher premiums as the National Flood Insurance Program phases out subsidized coverage.
The program was established in 1968 to reduce losses and help landowners rebuild after flooding. As it expanded over the years, the claims paid were either below or in line with premiums paid.
However, in the past decade, the U.S. has seen increasingly turbulent weather patterns and natural disasters. The hurricane season of 2005, the U.S. was slammed by Hurricanes Katrina, Rita and Wilma, resulting in $17.7 billion in claims paid out, far in excess of annual premiums.
According to the Government Accounting Office, as of November 2012 the Federal Emergency Management Agency, which oversees the insurance program, owed the U.S. Treasury approximately $20 billion and has not repaid any principal since 2010.
In 2012, Congress passed the Biggert-Water Flood Insurance Reform Act, ordering FEMA to make the flood insurance program actuarially sound — taking in enough premiums to cover expected claims.
David Miller, associate administrator of federal insurance and mitigation at FEMA, said the agency laid out plans for premium rate adjustments, requiring lenders and their regulators to demand flood coverage in proportion to the likelihood of flooding on properties they finance.
As a result, many policy-holders will see their rates increase 25 percent a year until their premiums reflect the full risk rate.
Frankenfield and his wife, Julie, who raise miniature donkeys on a former dairy farm she inherited, have seen the results of those new requirements first-hand. They acquired a low-interest home equity line of credit loan, using their house as collateral with the understanding they would need to insure the home against flood damage, he said.
What he did not expect was that he would need a separate flood insurance policy on each building on the property, including several old barns, some of them with dirt floors. His total flood insurance coverage amounts to $120,000, which is $20,000 more than his maximum line of credit.
“They’re making us over insure everything,” he said. “It isn’t fair if you’ve got a $10,000 or $40,000 loan to need a million dollars of insurance.”
A mortgage lender confirmed that any loan made, modified or renewed that is secured by property in a flood zone must have flood insurance at replacement cost value. “Not just (for) a loan on the home,” Ed Hedlund of Washington Federal said. “Everything has to be insured.”
Though fewer than 2 percent of Washington Federal’s loans in eight Western states are in flood zones, he said, increased premiums may mean problems for landowners.
“Our regulator is the enforcer on this,” he said. “We have no choice, though people do get mad at us.”
Especially problematic is the requirement that when property changes hands, the new owner will bear the burden of what Frankenfield called “inflated costs.” He feared the changes would affect property values after learning about a nearby farm up for sale.
“The sale was going through, but the people backed out because of the flood insurance,” he said. “They came back with an offer $100,000 lower.
“I believe that this is just another nail in the farmer’s coffin.”