Flood Insurance: Introduction

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National Flood Insurance Program (NFIP) How it all began In 1973, Hurricane Agnus caused some of the most devastating floods ever to strike the United States, resulting in billions of dollars in losses to private owners, banks, savings & loan companies, and the U.S. Treasury. As a result Congress began to take action. Following the disaster of Hurricane Agnus, Congress enacted the Flood Disaster Act of 1973. The Act requires flood insurance for most properties located in Special Flood Hazard Areas (100 year Flood Zones). Why Congress established the NFIP For decades, the national response to flood disasters was generally limited to constructing flood control works such as dams, levees, seawalls, and the like and providing disaster relief to flood victims. Disaster relief did not reduce losses or discourage unwise development. To compound the problem, the public could not buy flood coverage from insurance companies, and building techniques to reduce flood damage were often overlooked. In the face of mounting flood losses and escalating costs to the general taxpayers of disaster relief, Congress created the National Flood Insurance Program (NFIP). The intent was to mitigate future damage and provide protection for property owners against potential losses through an insurance mechanism that allows a premium to be paid for the protection by those most in need of it. What is the National Flood Insurance Program (NFIP)? The NFIP is a federal program enabling property owners to purchase flood insurance. This insurance is designed to provide an insurance alternative to disaster assistance to meet the escalating costs of repairing damage to buildings and their contents caused by flood and was, until recently, generally unavailable from private-sector insurance companies. The NFIP is based on an agreement between local communities and the federal government, stating that if a community will implement measures to reduce future flood risks to new construction in Special Flood Hazard Areas, the federal government will make flood insurance available within the community as a financial protection against flood losses that do occur. How the NFIP was established and how it is administered Congress established the NFIP with the passage of the National Flood Insurance Act of 1968. The Act was broadened and modified with the passage of the Flood Disaster Protection Act of 1973 and other legislative measures. The NFIP is administered by the Federal Insurance Administration (FIA), a component of the Federal Emergency Management Agency (FEMA), which is an independent agency. How a community participates in the NFIP A community applies to the Federal Emergency Management Agency. It needs to meet minimum floodplain management requirements. There are over 18,000 communities participating. To not participate in the NFIP means that there is: No flood insurance available No disaster assistance available No federal mortgage assistance in SFHA Flood insurance purchase requirements Coverage for the term of the loan Outstanding principal balance of loan, or maximum limit available Value of property minus the value of land Exemptions include: State-owned properties Small loans - original balance $5,000 or less and repayment term of one year or less Key dates to remember about the NFIP 1968: National Flood Insurance Act The Act was created because private insurers withdrew from writing flood insurance. The Act established the Federal Insurance Administration (FIA) and the National Flood Insurers Association (NFIA). Emergency and Regular Programs were first introduced. 1973: Flood Disaster Protection Act Required mandatory participation in the program for mortgage loans on property identified in the flood hazard area. Effective July, 1975 communities with one or more flood hazard areas had to participate or be denied any federal financial assistance. 1983: Write Your Own (WYO) was approved It was considered a more cost effective, efficient, and service-oriented approach to writing coverage. Today more than 90% of all NFIP business is written through WYO. 1994: The National Flood Insurance Reform Act Mandatory purchase requirements more strictly enforced on mortgage lenders through stringent rules and penalties. Lenders must escrow for flood insurance if they are escrowing for other purposes. Lenders are allowed to force-place flood insurance if property owner does not obtain it in a timely manner. "Mitigation Insurance" made available in 1996. 5-day notice of expiration required to property owner, loan servicer, and owner of loan. Increased amounts of insurance coverage available. 5-day waiting period increased to 30 days, with some exceptions.

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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.