Insurance Law

April Fool's Day Sees National Flood Insurance Rates Rise

By J. Wylie Donald

So what day would you pick to have your flood insurance premium double? April Fool's Day? You got it.

Well, that's a little hyperbolic. Rates aren't doubling instantaneously tomorrow. Instead they are rising between 10% and 18% per year until they match commercial rates. There is a set of exceptions to the 18% cap. There can be up to a 25% increase on non-primary residences, so-called "severe repetitive loss" properties and substantially-damaged / substantially-improved properties. Other changes are an increase in deductibles and the assessment of various fees and surcharges (which don't count in the calculation of the capped interest rate).

What homeowners and businesses are seeing is the implementation of the Homeowner Flood Insurance Affordability Act (HFIAA) of 2014 and the continued implementation of the 2012 Biggert-Waters legislation. These laws, in response to the great expense visited on the National Flood Insurance Program from Hurricane Katrina and Superstorm Sandy, and others, are an attempt to bring back the NFIP from $23 billion in debt.

So what does it mean on the street? Simply stated, the marginal cost of owning a home near the water just went up. And what does that mean? It is not clear that that will improve littoral resiliency. First, more people will go without insurance. Which means after a flooding catastrophe, more people will be without resources. Second, It will be harder to sell a home at a given price in the Flood Hazard Area or adjacent to a Flood Hazard Area. That may lead to hardship for sellers when they have to sell for less, but not necessarily for buyers who for the same amount of money will continue to have an insured property.

Resilience or not, however, making the flood insurance premium commensurate with the risk is financially sound and for that it should be lauded. We will have to see whether it stands the test of time, however. Congress tried reform in 2012, and had to double back on itself and reform the reforms in 2014. Stated differently, who will be the April Fool?

    J. Wylie Donald, a partner at McCarter & English, LLP, counsels and litigates for clients on insurance coverage, environmental and products liability matters. Mr. Donald co-chairs the firm's Climate Change and Renewable Energy Practice. He draws on his substantial environmental experience, his prior non-legal technical work, and his deep involvement in risk management to assist clients in understanding and controlling the coming regulatory and non-regulatory impacts of climate change. He has tried cases and argued appeals in the state courts in New Jersey and Maryland, conducted private arbitrations and mediations, and argued motions in federal courts across the nation.

Read more at Climate Lawyers Blog by McCarter & English, LLP.

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