• National Flood Insurance Program: The Basics
  • August 17, 2006 | Author: Vicki R. Harding
  • Law Firm: Pepper Hamilton LLP - Detroit Office
  • The stark images of New Orleans underwater in the aftermath of Hurricane Katrina served as a reminder that flood risks are a required consideration in most decisions to build or to rebuild.

    Evolution of Federal Program

    Federal flood control activities have evolved as the government continues to seek ways to mitigate the consequences of flooding. Until the mid-1960s, federal involvement was limited to flood control projects, such as dams or levees. However, private insurance companies were not able to provide flood insurance at affordable rates, and flood losses and the cost of disaster relief continued to rise. As a result, legislation passed by Congress in 1965 to provide relief to victims of Hurricane Betsy also authorized a study of the feasibility of national flood insurance, which eventually led to the National Flood Insurance Act of 1968.

    The 1968 Act, which created the National Flood Insurance Program (NFIP), sought to provide relief to individuals for losses through flood insurance, to reduce additional losses through State and community floodplain management, and consequently to reduce federal costs for flood control and disaster relief. (The program was extended to cover mudslides in 1969 and flood-related erosion in 1973.) The NFIP tasks included identifying and mapping floodplains – resulting in Flood Insurance Rate Maps (FIRM) – to help educate people about potential risks and provide information required for floodplain management and the flood insurance program.

    Under the 1968 Act, if a community adopted and enforced a floodplain management ordinance to protect new construction from flood hazards, subsidized insurance rates were available for buildings in flood hazard areas before a FIRM was developed for the community. Initially, the federal government relied on the incentive of subsidized flood insurance to achieve the desired goal of shifting development from flood prone areas. However, experience demonstrated that this was not sufficient. In 1972, Tropical Storm Agnes caused extensive river flooding in the northeastern United States. Most of the affected property was uninsured, and the cost of disaster relief was as high as for any prior flood disasters.

    In response the Flood Disaster Protection Act of 1973 moved beyond strictly voluntary measures. Under the 1973 Act, federal agencies are prohibited from providing financial assistance for acquisition and construction of buildings in communities that failed to participate in the NFIP by designated deadlines. Additionally, federally regulated or insured lenders and federal agencies were obliged to require flood insurance for loans or grants for acquisition or construction of buildings in Special Flood Hazard Areas (SFHAs). (An SFHA has been defined as land in a floodplain that has at least a one percent chance of flooding in any year, commonly referred to as a 100-year flood.) Today, regulated lenders are still obligated to require flood insurance for property located in SFHAs in participating communities, although the 1973 Act was amended in 1977 to permit lenders to make conventional loans for property located in SFHAs in non-participating communities, if the lenders notify the owner or lessee about whether federal disaster assistance will be available.

    In 1994, the 1968 Act and the 1973 Act were amended by the National Flood Insurance Reform Act, which among other things imposed new requirements on mortgage originators and servicers (including mandatory escrows for flood insurance and mandatory provisions for forced placement of insurance); codified the Community Rating System of the NFIP, which provides flood insurance premium discounts for communities that establish programs that go beyond NFIP minimum requirements; and provided added emphasis on activities designed to further mitigation of future flood damage.

    Flood Hazard Identification and Assessment

    By statute, the Federal Emergency Management Agency (FEMA) must identify and evaluate flood risks. From the beginning, the NFIP has used the 100-year flood as the standard (referred to as the Base Flood). Since information necessary to define flood risks necessarily requires time to develop, the insurance program began on an emergency basis with Flood Hazard Boundary Maps that identified only the boundaries of 100-year flood floodplains on an approximate basis. For most communities, a more detailed study was subsequently conducted, typically using engineering methods based on computer models and/or statistical techniques.

    A detailed Flood Insurance Study (FIS) typically includes identification of the following:

    • 100-year flood elevations (Base Flood Elevations, or BFEs) in terms of either water-surface elevations or depth of water flow above ground
    • water-surface elevations for the 10-year, 50-year, 100-year and 500-year floods
    • boundary of the regulatory floodway (for non-coastal SFHAs), which is a stream channel and adjacent floodplain areas that must be kept free of encroachment so that discharge of the Base Flood (100-year flood) does not increase the Base Flood Elevation by more than one foot
    • boundaries of the 100-year floodplain (the Special Flood Hazard Area, or SFHA) and the 500-year floodplain – with the results included in a Flood Insurance Rate Map (FIRM).

    Flood elevations for rivers, streams and lakes are determined by taking into account precipitation and runoff, with SFHAs identified as A Zones on the applicable FIRM. For coastal areas, factors include storm surge, wind direction and speed, and wave heights, with SFHAs identified as either A Zones or V Zones – where V Zones are the more hazardous areas with conditions that support damaging waves of at least three feet in height.

    FEMA has issued guidelines that provide technical requirements and specifications for Flood Hazard Maps and related matters. A draft FIS is developed under procedures found in 44 CFR Part 65 and Part 66. Before the FIS becomes final, it is subject to a statutory public comment and appeals period, where property owners and tenants have an opportunity to challenge elevation determinations based on scientific or technical objections.

    FEMA has developed several procedures for amending current FIRMs, including a Letter of Map Amendment (LOMA) to correct a map when a specific property has been inadvertently included in an SFHA, a Letter of Map Revision (LOMR), a Letter of Map Revision based on Fill (LOMR-F) and a Physical Revision and Republication (PMR) to document changes, generally based on manmade changes to the floodplain.

    Properties may be removed from the 100-year floodplain based on protection from a levee or floodwall system that meets criteria set forth in 44 CFR §65.10. As Katrina demonstrated, relying on a protective system can be catastrophic if the system fails to provide the expected protection – whether because the system fails or the flood event exceeds the 100-year flood design basis.

    A significant percentage of the flood maps are now more than ten years old. FEMA recognizes that these outdated maps require modernization. As development occurs, flood hazards generally increase, and outdated maps tend to understate flood risks. In addition, current techniques promise more accurate, useable products. Unfortunately, FEMA lacks the funding required to implement its proposed map modernization plan.

    Floodplain Management

    A community must adopt and enforce a floodplain management program that meets NFIP criteria before FEMA can provide flood insurance for property in the community. The program requirements are designed to minimize future flood damage.

    As a general rule, a new or substantially modified building in an A Zone must have the lowest floor elevated to at least the Base Flood Elevation, and a new or substantially modified building in a Z Zone must be elevated so that the bottom of the lowest horizontal structural member of the lowest floor is at or above the Base Flood Elevation. As indicated, these requirements apply to both new buildings and those that are substantially improved or substantially damaged – meaning the cost of the improvement or restoration is 50 percent or more of the market value of the building. Also, for non-coastal A Zones, a community must designate a regulatory floodway that can carry away water from a 100-year flood without increasing surface water elevation more than one foot at any point.

    National Flood Insurance

    Flood insurance covers damage and loss to real and personal property caused by floods. Under the NFIP, policies are issued both by state licensed property and casualty insurance brokers and agents who deal with FEMA, and by private insurance companies who issue policies and adjust claims under the “Write Your Own” program. Generally there is a 30-day waiting period before a policy becomes effective, which is designed to prevent the opportunistic purchase of flood insurance in connection with progressive river flooding.

    There are three policy forms: (1) Dwelling Form for 1-4 family buildings and individual condominium owners, (2) General Property Form for more than four-family residential and non-residential buildings, and (3) Residential Condominium Building Association Policy Form for condominium associations. Residential buildings under the first two forms are eligible for up to $250,000 building coverage and $100,000 contents coverage. Non-residential buildings are eligible for up to $500,000 building coverage and $500,000 contents coverage. Under the third form, a condominium association can purchase building coverage that includes all of the units and improvements in the units for up to $250,000 building coverage per unit and $100,000 contents per building. Certain other types of coverage are also available, depending on the form.

    The Problem of Repetitive Losses

    Recent efforts by Congress to refine and extend the flood legislation have included a focus on the problem of repetitive losses. For example, the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 established a pilot program for mitigation of repetitive loss properties (i.e. currently insured properties that have experienced two or more flood losses of more than $1,000 each within a 10-year period).

    The devastation caused by the 2005 hurricane season has led to further examination of the difficult questions surrounding decisions to rebuild in flood-prone areas. Is it appropriate to continue to rely on New Orleans levees to protect against future flood? If the answer is yes, but only if sufficient funding is available to properly maintain the levees, what happens when promised funding is not made available? What are the consequences of writing off an entire city? Can we afford to rebuild New Orleans? Can we afford not to? The answers to questions such as these will inevitably have a profound effect on future development of our national policy on flood hazards