July 27, 2007

Flood insurance for wind damage??

A House committee has voted to expand the federal flood insurance program to include wind damage as well the Miami Herald reports. A similar story appreared in the Va Pilot.
The action stems from claims that insurers refused to pay for damage they claimed was caused by water. This happened in many areas of Mississippi and Louisiana where homeowners did not have flood insurance. The result was many homeowners whose damage was not covered by insurance. The bill would offer an second tier of flood insurance that includes insurance against wind damage, ensuring that any damage would be covered.
Under the bill approved by the House committee, policyholders of the flood insurance program would be able to purchase wind policies as well. The policies wouldn't be available for those exclusively seeking wind coverage.
The multiple-peril residential policy limit would be set at $500,000 for the structure and $150,000 for contents. Maximum coverage for flood insurance policies would rise from $250,000 to $335,000 for residences.

Needless to say the insurance industry sees this as a bad idea. The industry's lobbying arm claims the bill would create a needless duplication of services and that the current mix of state and private wind offerings are sufficient.
According to PCI, the combination of homeowners’ insurance coverage, state wind pools and flood coverage available through the National Flood Insurance Program (NFIP) already provide consumers protection from wind and water damage. Moreover, the current system provides consumers the opportunity to purchase coverage at a price that reflects the risk based on the location of the property and the likelihood of a loss.
“State residual market mechanisms provide wind coverage where there is no market, and private insurers provide wind coverage where there is a market,” McKay said. “The Taylor bill simply creates a federal government fund that will compete with existing state funds and potentially with the private sector.”
It strikes me that is more political theater than good public policy. The bill would not require the very people it purports to protect to buy either flood or flood and wind coverage. It was the lack of flood insurance,not wind insurance that caused the problem in the first place.
Accees to wind insurance is a big problem in our area. Most private insurers don't offer wind damage coverage but instead place homeowners in the State's wind pool. Wind pool policies are backed by contributions from the state's insurers using a complex formula based on volume, type and location of the firms policyholders. The state has tried several times to increase the availability of private wind insurance with little effect. The wind pool coverage is limited though within its limits is better than no wind insurance. Florida goes even further and has created a separate state disaster fund to help insurance companies deal with catastrophic events that might otherwise bankrupt them or drive them out of the insurance market.
Its not clear how this new federal program would supplement the existing market, nor is it clear how simply adding wind coverage would help people who didn't buy flood insurance in the first place. It does allow Nancy Pelosi to go to La. and claim "we solved your problem."
We need a more comprehensive approach to the country's disaster response policy. I don't share Monty's view that flood insurance subsidies wealthy ocean front property owners and shouldn't be available at all ocean front properties:
I am 100% opposed to Federal Flood Insurance covering any portion of ocean front development; in fact, I think the Feds should cease to insure anything in a "V" flood zone. If 100% of the cost of V-zone development was borne by the private sector, the size of ocean front homes would diminish, the value of the lots would decrease, and a vicious cycle of bigger homes=bigger rents=bigger lot prices would cease. In that same vein, I would not be opposed to FEMA refusing to help new ocean front construction in eroding areas, and the SBA should think twice about low interest loans to businesses on the ocean front built in the last decade. If nourishment were to occur, I would support a building ban on any "recovered" lots and parcels that are currently un-buildable.

I don't think Flood insurance should be used as a land use planning tool. If we want small homes then require smaller homes or don't allow short term rentals ala the Fla. Keys. There are plenty of ways to break the cycle. Flood insurance isn't one of them. The coverage limits already make flood insurance almost irrelevant to large rental properties. Coverage tops out at $250,000. In fact the premiums the large homes pay helps keep everyone's cost down. Remember this is insurance the larger the risk pool the lower the rates. Federal Flood claims are paid by premiums not subsidies and the program reduces damage dramtically:
Flood damage is reduced by nearly $1 billion a year through partnerships with communities, the insurance industry, and the lending industry. Further, buildings constructed in compliance with NFIP building standards suffer approximately 80 percent less damage annually than those not built in compliance. And, every $3 paid in flood insurance claims saves $1 in disaster assistance payments.

Flood insurance claims and all operating expenses of the program are paid for through premiums. None of these costs are paid by taxpayers.

Monty further cites a column from the John Locke Foundation that perpetuates the fallacy of flood insurance subsidies then goes on to some pretty standard coast bashing:
Coastal property owners receive a wealth transfer from taxpayers in general, because the costs of recovery through FEMA are financed by all taxpayers. Benefits go specifically to property owners. If property holders were instead paying a market price for flood or hurricane insurance, it's certain that coastal development in North Carolina would be drastically different than it is today—and almost without doubt, much less extensive. Risk-rated insurance premiums would ensure that those who benefit also bear the costs.
This whole "the coast is the only place that has disasters so we shouldn't live there" just drive me crazy. It ignores every other natural risk that affect the rest of the state and country for that matter. When the feds stop paying for earthquake recovery or tornado damage or ice storms or riverine flooding then I will gladly give up our federal hurricane recovery support including federal flood insurance.
It doesn't make sense for us to cut ourselves off from the rest off the country. We are stronger because we offer support to one another. What we need is a better comprehensive policy on federal disaster response. It needs to include requirements for pre disaster mitigation, reasonable insurance coverage, and fair sharing of the costs, either on a percentage basis or based on the amount of damage. Without such a policy (and the political will to make it stick) we continue arguing about who is making bad development decisions, what is a disaster and who should pay for the recovery.
Keep an eye on this bill. We'll see if Congress wants real reform or political theater. Lets hope for a major overhaul of the system that adds a component of personal responsibility but maintains the safety net but don't be surprised if it is replaced by band aids and sound bites.


At 1:55 PM, Blogger Brian Martin said...

You are misinformed. Many people had flood insurance, but all of their damage was not caused by flooding. State Farm instructed its adjusters that “Where wind acts concurrently with flooding to cause damage to the insured property, coverage for the loss exists only under flood coverage, if available.” Other companies used similar tactics to deny paying for wind damage and shift costs to taxpayers and policyholders. So if a house was destroyed by the combination of wind and flood, as happened in Katrina, either the flood insurance paid for both wind and flood damage or the wind damage was not covered, despite years of premium payments. They only started negotiating settlements after they were hit with punitive damages in court. Then the companies announced they would not write any more coastal policies.

At 8:10 PM, Blogger BOBXNC said...

Brian, can you provide me with any links to news stories about this practice. I don't doubt what you are saying but I would like to follow up with better information.
I still am not convinced that adding wind coverage is the best way to proceed. It strikes me it might be better policy to provide better regulation and enforcement of existing homeowners policies.
Thanks for your input.

At 11:57 PM, Blogger Monticello said...

My opposition to Federal Flood Insurance isn't against the Feds offering it; its against their (former) incredibly lousy risk-rating and the fact that they cap it $250,000. The rate for $250,000 and under has been incredibly low for decades, it had little relation to the risk involved. Only recently have those rates come closer to reality, but for many years, these cheap rates encouraged development without the attendant costs equal to the risk. A private sector plan would have charged much more for much longer, allowing the market to self-regulate development to some extent. The $250,000 limit encouraged owners, especially low-to-moderate income folks in river and inland flood prone areas to buy the minimum amount, only to find out the replacement cost of their homes were more than $250,000 and thus, uninsured.

I agree with your assessment on the Locke article to the extent that they overlook the same issue in other disaster related areas (in this article), but I bet the same writers would hold similar views on property in other areas of the country.I just don't think it was in the scope of that article, but like you, I get mad when Left Coaster's get disaster aid living on the side of a sheer mud cliff and we have to fight for every penny after each storm.

Great post!

At 2:41 PM, Blogger Cindy Lee said...

Having family that lived in both New Orleans and Biloxi at the time of Katrina I know for a fact that for many it took a lawyer to get the insurance company’s to pay. My brother and sister-in-law who live in New Orleans were lucky; they had savings and a good lawyer. They used their savings to get the repairs they needed done and let their lawyer deal with the insurance company. The insurance company has one goal and one goal only; make and keep money. If it takes the government offering wind insurance to keep the insurance companies in line so be it.


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