All posts tagged 'National Flood Insurance Program'

The NFIP is Renewed and Reformed, and Climate Change Is Very Much in the Picture

July 8, 2012 14:18
by J. Wylie Donald
President Obama signed the Moving Ahead for Progress in the 21st Century Act, aka "MAP-21", this past Friday.  Support was broad:  the House voted 373-52; in the Senate it was 74-19 in favor.  The bill is a potpourri.  The bulk of the enactment addresses surface transportation topics, but it also includes measures to keep down student loan interest rates, overflights of the Grand Canyon, sport fish restoration, and extensive reform of the National Flood Insurance Program (including significant climate change provisions).  Interestingly, the White House eschews both statutorily-provided titles and chooses a simpler nomenclature, the Transportation and Student Loan Bill.  According to the White House, the Bill "accomplishes two important goals -- keeping thousands of construction workers on the job rebuilding America's infrastructure and preventing interest rates on federal student loans from doubling." These features are important, but we think the bill's significance will come from the unheralded feature:  reform of the National Flood Insurance Program (NFIP).  Reform is sorely needed.  As stated on the FEMA "Rethinking the NFIP" website, "The NFIP was designed as a means of discouraging unwise occupancy of flood prone areas, yet occupancy of these areas has expanded since 1968. Additionally, as risks continue to increase, the cost of flood insurance mirrors that increase, making it unaffordable for many Americans."  Criticism of the NFIP was nearly universal following Hurricane Katrina.  The program was underfunded - premiums came nowhere near the amount needed to cover claims (the NFIP is over $15 billion in debt).  Floods were repeatedly damaging the same properties, which had been rebuilt sometimes three or four times in the same location.  Fewer than half the properties at risk were covered; in some areas uninsured properties were the substantial majority.    The Washington Post in a 2005 editorial called for compulsory insurance and the end of subsidized rates.  A Wall Street Journal article reached similar conclusions.  Notwithstanding, reform could not be obtained.  The NFIP limped along living (and, on occasion, even dying) on borrowed time.   Since 2008, it has been extended no fewer than 15 times.  Four times the program lapsed as lawmakers could not come to terms.    Somehow, however, with the most recent extension due to expire on July 31, reformers prevailed and the act was revised and extended for another five years to September 30, 2017.  The reform act, known as the Biggert-Waters Flood Insurance Reform Act of 2012 (sec. 100201)), can be found at Title II of Division F (Miscellaneous) of MAP-21.   The reforms are extensive (and they will leave many wondering how any of these reforms were opposed in the first place).  Among other things, the bill provides: Subsidies for many properties are being phased out.  For example, a "severe repetitive loss property" (i.e., where payments for flood-related damage exceed fair market value of the property) is no longer eligible for a subsidized rate (sec. 100205(a)(1)). In setting rates the principles and standards of the American Academy of Actuaries and the Casualty Actuarial Society are to be followed, including "an estimate of the expected value of future costs" (sec. 100205(b)(3)).  The "average historical loss year" is to include "catastrophic loss years" (suggesting that previous averages did not include catastrophic losses, which is a calculus many would like to use with their insurers) (sec. 100211). Insurance premiums can now rise up to 20% per year (sec. 100205(c)).  10% was the earlier cap on premium increases. Multifamily properties (greater than 4 residences) can now  purchase NFIP policies (sec. 100204). There are now minimum deductibles for flood claims (sec. 100210).. A Technical Mapping Advisory Council is established to address flood map revision and maintenance  (sec. 100215(a)). A variety of studies are required:  among others, a study of the addition of business interruption and additional living expenses coverages; a report on graduated risk behind levees; a report on privatizing the NFIP; a report on "nationally recognized building codes as part of the floodplain management criteria", and a study on participation in, and affordability of, the NFIP (secs. 100231, 100232, 100233, 100235, 100236). In light of the politicization of the climate change topic, perhaps the most astounding of all the changes in the NFIP is the acknowledgement in the bill that climate change is a critical consideration in establishing a program that works.  (We and others have called for this for some time, see Underwater?  What Climate Change Means for a Loan Portfolio Near the Flood Plain).  The Technical Mapping Advisory Council must report to the FEMA Administrator within one year of enactment on the following: 100215(d) Future Conditions Risk Assessment and Modeling Report- (1) IN GENERAL- The Council shall consult with scientists and technical experts, other Federal agencies, States, and local communities to-- (A) develop recommendations on how to-- (i) ensure that flood insurance rate maps incorporate the best available climate science to assess flood risks; and (ii) ensure that the Federal Emergency Management Agency uses the best available methodology to consider the impact of-- (I) the rise in the sea level; and (II) future development on flood risk; ... And this report cannot just sit on the shelf.  The Administrator is obligated to, "as part of the ongoing program to review and update National Flood Insurance Program rate maps ..., shall incorporate any future risk assessment submitted [in the required report] in any such revision or update." (sec. 100215(d)(2)). We note that the statute speaks definitively about sea level rise.  It is not something indefinite; rather, the report must consider the impact of the rise in the sea level.  We also note that "best available climate science" is standard phrasing at NOAA, and the National Park Service, as well as among NGOs.  How it will fare in the ultimate report is, of course, unknown.  But we do not expect the effects of climate change will be shouted down, turned away or buried.  At the end of the day, the conclusions in the report will influence how money is to be spent and who will profit.  The best way to figure that out is to use the best information.  Certainly some will have an interest in obscuring the best available science, but the bipartisan support of the bill suggests that many more may have an interest in just getting the best answer.

Climate Change | Climate Change Effects | Flood Insurance | Legislation | Regulation | Rising Sea Levels

Flooding from Irene: Whither the Flood Plain?

August 30, 2011 20:50
by J. Wylie Donald
My train this morning usually continues to New York. Today it terminated in Philadelphia, a victim of the deluge delivered by Hurricane Irene. Amtrak explained: Most Northeast Regional service will operate south of Philadelphia, but no Acela Express, Northeast Regional or other Amtrak trains can operate north of Philadelphia to New York. As of early this Monday evening, about a half-mile of Amtrak right-of-way remained submerged near Trenton, N.J. As the water levels recede, Amtrak engineering forces will make repairs to the track and signal control infrastructure. Updates will continue to be provided and an estimate for restoration of full service south of New York is not yet available. Many attribute the recent spate of natural disasters (heat waves, droughts and wildfires in Texas, tornadoes in Missouri and Alabama, Hurricane Irene) to the effects of climate change. We reserve judgment. Climate change is about trends, not individual events. One trend we are watching closely is the status of flood plains. We dug up the Flood Insurance Rate Map for the Trenton train station. The Amtrak right of way mentioned above is in the 100 year flood plain. We weren't able to determine how many times it had flooded recently, but the mayor of nearby Lambertville noted that they have been flooded out 5 times in the last ten years.   The flood at the train station was a record, nearly seven feet above flood stage.  Id. And  a study out of the University of New Hampshire  reports New Hampshire has experienced 4 100-year floods in the last four years.  Some may discern a trend. Fortunately, we are not the only ones watching. FEMA is in the process of preparing a report on climate change impacts on the National Flood Insurance Program. Preliminary information indicates that some Special Flood Hazard Areas (the 100-year flood plain) will double in size and that by the next century the nation's flood plain will be 40%-45% larger.  Look for The Impact of Climate Change on the National Flood Insurance Program to be out this fall. FEMA currently does not directly address climate change in the NFIP, because its practice is to make its assessment based on the historical record.  But that does not mean communities and businesses cannot.  For example, a community may request that the applicable Flood Insurance Rate Map address future conditions.  44 CFR 64.3(a)(1).  Where business continuity planning is standard practice (and we hope that is everywhere) vulnerability assessments need to ask not only where is the flood plain, but where is it likely to be.  Many have been off to a slow start on climate change planning.  But, as with trains, late is better than never. View of Trenton Amtrak right of way (c) Times of Trenton

Climate Change | Climate Change Effects | Flood Insurance | Regulation

NFIP Renewal. Finally. For a Moment.

July 6, 2010 16:22
by J. Wylie Donald
Well, they finally got around to it. Since May 31 the National Flood Insurance Program has had no authority to issue flood insurance contracts. The House approved extending the NFIP's authority on June 23, the Senate on June 30, and the President signed the bill July 2, retroactive to June 1 (fittingly, the first day of the official Atlantic hurricane season). This is not a new circumstance. The NFIP's authority first lapsed on March 1, again on March 28 and will do so again on September 30, absent a long-term extension. So what does it mean when the NFIP can't make loans? Dante described a place of sadness and hopelessness in Limbo, the first circle of hell. The metaphor seems apt: a would-be home or small business buyer that cannot get required flood insurance, cannot purchase; she is stuck in a bureaucratic Limbo from which there is no escape but the grace of Congress. Ditto for the home or small business seller. Is there reason to think otherwise? The various National Flood Insurance Acts forbid lenders from making loans on property located in a Special Flood Hazard Area where federal flood insurance is available. 42 U.S.C. § 4012(a). Since the lapse in NFIP authority means that federal flood insurance is not available, lenders are authorized to make loans on property in the flood plain, without requiring flood insurance first. The FDIC confirms this in its May 7, 2010 Financial Insitution Letter FIL-23-2010 (click here.)  However, lenders are not released from the obligations under the Acts to make flood determinations, provide notices to borrowers and otherwise comply with the flood insurance regulations. The FDIC confirms that lenders "should evaluate safety-and-soundness and legal risk and prudently manage those risks during the lapse period." Lenders are also required to establish a program to ensure that borrowers obtain flood insurance when (as has happened) the program is reauthorized.   So, what is a prudent lender to do during the lapse period. The FDIC recommends: 1) postpone closing the loan (see Limbo above), 2) close the loan and require the borrower to obtain private flood insurance (which, if such existed at favorable rates, would demonstrate the NFIP is unnecessary), and 3) make the loan without requiring the borrower to apply for flood insurance. But that is a Catch-22 as well. As the FDIC points out, "Each lender remains responsible for protecting its collateral from risk in a manner appropriate to the circumstances ...." If the property is in a SFHA, a loan is given and the property is destroyed by flood, what regulator will recognize that as a prudent lending practice "appropriate to the circumstances"? So, even if lenders may lend when the NFIP lapses, it seems evident that they will not. As we have written before, the NFIP has numerous issues (premiums that do not match risk, billion dollar deficits, lack of penetration into the populations at risk). Serial lapses of authority and serial reauthorization simply compound these problems.

Climate Change | Climate Change Litigation | Weather

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