Most homeowner’s insurance policies don’t protect owners against flooding. For this reason, many people in flood-prone areas obtain insurance through the federal government’s flood insurance program.
But thanks to a new law, flood insurance rates are set to go up, and in some cases they will see a dramatic increase.
Here’s why: In the past, many people who obtained flood insurance received lower rates due to government subsidies. In effect, they were “grandfathered” at older rates that didn’t reflect the true risk of flood damage to the property.
Back in 1968, the government adopted new minimum construction standards designed to minimize flood damage. But many pre-1968 buildings that didn’t meet the new standards were allowed to be “grandfathered” and pay lower rates as though they met the new requirements.
Also, since 1968 the national flood maps have been redrawn a number of times, resulting in many properties now being listed as being in a flood zone that weren’t previously in such a zone. However, these properties were often also “grandfathered” and allowed to pay their old, non-flood-zone rates.
The problem is that, with so many people paying lower rates, the government’s flood insurance program wasn’t able to stay solvent. After the devastation of Hurricane Sandy, the program was almost $25 billion in debt and had to borrow money from the U.S. Treasury.
So Congress passed a law doing away with most of the subsidized rates, and generally requiring property owners to pay insurance premiums based on the property’s true risk of flooding. That will mean rate hikes, sometimes very substantial ones, for many property owners. In some cases, premiums could increase as much as tenfold.
Subsidies will be eliminated first for businesses, vacation homes, and primary homes that have flooded repeatedly in the past. Other homes might continue to be subsidized until new flood maps are drawn or until the property is sold.
For properties with very large premium increases, the increase might be phased in over several years.
What it means: If you’re buying a property where there’s any risk of flooding, you’ll want to investigate the latest insurance premiums (and expected future changes) so you’ll know exactly what you’re getting into. Keep in mind that many properties that aren’t on the waterfront can still be well within a flood zone.
If you’re a homeowner, you might want to consider updating the property. In some cases, improvements as simple as adding vents to help channel water in case of a flood can significantly reduce your premiums. You might also consider keeping premiums lower by increasing your deductible.