Flood insurance relief becomes law

March 24, 2014
Author: Florida Realtors .org

“This law brings great relief to Realtors across Florida, especially people living in those communities that bore the brunt of the unexpected and sometimes overwhelming premium increases. We whole-heartedly thank all the members of Congress who made this possible,” says 2014 Florida Realtors® President Sherri Meadows, CEO and team leader, Keller Williams, with market centers in Gainesville, Ocala and The Villages. “While we still have some concerns, H.R. 3370 provides immediate relief for many of Florida’s homeowners, homebuyers and sellers.”

Florida Realtors hopes homeowners will gain even more relief moving forward, Meadows adds.

“We’re currently talking to Florida lawmakers about private insurance options in the state,” she says. “Currently, almost all policies go through the National Flood Insurance Program (NFIP). We want to encourage private insurers to enter the flood market; and we hope homeowners will then be able to choose from different levels of flood insurance coverage.”

Flood insurance disclosure

“Prior to the signing of the flood insurance bill, we recommended that Realtors use a disclosure to alert prospective buyers to possible changes in the cost of flood insurance after closing,” says Margy Grant, Florida Realtors vice president and general counsel. “That disclosure is now outdated, and we’ve taken it out of Form Simplicity (Florida Realtors’ transaction management service) and alerted other forms providers as well.”

While the disclosure is no longer needed, Grant says she’s analyzing the new law now with an eye to Florida Realtors’ contracts and forms. Once completed, she expects updated flood insurance language to be similar to the current language on homeowners insurance.

“Some Florida Realtors contracts and forms refer to the Biggert-Waters Act and changes created by its passage,” she says. “If necessary, we’ll update forms to reflect any new requirements. We’ll keep members informed. In the meantime, specific questions can be addressed to lawyers on Florida Realtors Legal Hotline.”

The Legal Hotline is a free service for members of Florida Realtors.

Changes for buyers and sellers

Before President Obama signed the new law, the amount of money paid for flood insurance coverage would readjust at the time of sale for pre-FIRM homes (ones built before the creation of flood insurance rate maps). As a result, a buyer might be forced to pay thousands of dollars more for flood coverage, which directly impacted the value of the home.

Under the just-passed bill, however, flood insurance prices have continuity: The purchaser is treated the same as the current property owner. Flood insurance rates may still go up for a buyer under rules in the new law, but they won’t rise any more than they would have if the current owner retained the property.

Frank Kowalski, 2005 Florida Realtors president and also an insurance agent, says he’s “elated with this outcome and thankful to the Senators and members of Congress that stood with Realtors and homeowners.” But, he says, “We should not expect any overnight changes.

“While a buyer no longer faces a huge flood insurance hike at the time of sale, it will take time for mortgage and insurance companies to adapt to the change,” Kowalski says. “The Federal Emergency Management Agency (FEMA) must study the bill, and specific rule changes not addressed in the bill’s language must be solidified. Insurance companies must then be notified; software must be upgraded; and line agents must be educated.”

Kowalski says that the process “will take time – and it will take some companies more time than others.”

Changes for homeowners

FEMA now cannot raise any single homeowner’s flood rate more than 18 percent per year; but FEMA has another restriction: It cannot raise flood insurance rates within a single property class more than 15 percent per year on average.

The new law directs FEMA to increase flood rates by at least 5 percent for most homes that pay less their actuarial rate currently. (An actuarial rate is one considered a fair balance between premium amount paid and the chance of damage from flooding.) However, it also pushes FEMA to keep a single yearly increase lower than 1 percent of a property’s value. (Example: FEMA should try to keep a yearly increase below $1,500 for a homeowner in a $150,000 property.)

One change – a fee increase – impacts all homeowners with NFIP policies: An annual surcharge of $25 for primary residences and $250 for second homes and businesses will be charged until subsidized policies in NFIP’s portfolio reach full risk rates. The increase is an attempt to reduce the $24 billion deficit FEMA now has, due largely to payouts following two hurricanes, Katrina and Sandy.

According to Kowalski, it’s not clear what will happen to homeowners currently paying low-risk rates, but the new $25 yearly fee probably applies to them. “Are they considered grandfathered in at lower rates?” Kowalski asks. “It’s not clear yet.”

Finally, a previous provision forced any homeowner who improved or renovated a home more than 30 percent to pay full actuarial rates. Under the new law, however, that threshold has gone back to its historic norm of 50 percent. An upgrade below that percentage will retain any existing flood insurance premium savings.

Homeowners who already paid

Some homeowners impacted by higher flood insurance rates have already paid for their coverage, and they deserve a rebate – but that rebate may not come quickly.

Many properties conformed to code when they were built, only to find later that FEMA redid its flood insurance rate map (FIRM) and identified the properties as below code. These homeowners were among the people who saw the biggest increase in their flood insurance bills.

Under the new law, however, these properties are now “grandfathered in,” meaning their lower rate stays because the homes were originally built to code. (Also important: The grandfathering stays with the property, not the policy.)

Owners who have already paid the no-longer-required higher coverage benefit can expect to get money back.

“Again, however, that will take time as FEMA and companies work out the details,” says Kowalski. The most pessimistic estimates suggest homeowners due a refund may end up waiting a year or even 18 months for their money.