No More Flood Insurance Grandfathering

Exactly one year ago, the East End was a ghost town. Businesses were boarded up. Houses were emptied. And homeowners were evacuated.

Hurricane Sandy had just hit—and she hit hard. The aftermath was overwhelming.

When property owners returned to their devastated shorefronts and beloved residences, they surveyed the damage and filed claims, plunging the federally funded National Flood Insurance Program, not yet recovered from Hurricane Katrina, into even more debt—from $18 billion to a whopping $25 billion in the red.

The superstorm inspired some owners of waterfront or low-lying properties to be proactive by lifting their houses or even moving them back, away from the water. Others have decided to leave the structures where they stand, tempting fate and, now, their flood insurance premiums.

In a move that is thought to help ease the National Flood Insurance Program deficit and financially stabilize the program, flood insurance premiums are sharply increasing across the board—at most 20 percent—for at least the next three years, according to lawmakers and real estate agents. The hikes are brought on by an overhaul of the National Flood Insurance Act of 1968—the Bigger-Waters Flood Insurance Reform Act of 2012—which was passed last year by Congress with bipartisan support.

Effective October 1, the legislation called for the elimination of long-term subsidies and “grandfathered” rates that have kept down rates for homes in flood zones. In low-lying areas of the country, such as parts of Florida and Mississippi, some homeowners are confronting annual premiums ranging from $3,000 to $33,000, or more depending on the cost of the home and its risk. Here in the Hamptons, where waterfront homes and those in low-lying areas can cost many millions of dollars, the new rates could be astronomical.

According to reports, about 600,000 homeowners across the country will see their rates rise only if they buy new policies or allow their current policies to lapse. However, the premium increases may discourage potential buyers from buying a waterfront property, as they will be forced to pay the new rate. If that fear is realized, it could have crippling effects on property values and the real estate industry, not only locally but nationwide, U.S. Representative Tim Bishop said last week during a telephone interview.

“Biggert-Waters is the law of the land. That’s our concern,” according to Mr. Bishop, a Democrat who voted in favor of the reform last year and is now seeing its “unintended consequences,” as are many of his fellow legislators, he said.

“Our concern is if premiums are beyond a reasonable level, that’s going to have a negative impact on the housing market,” he continued. “We all know the impact the housing market has on our broader economic health. And that’s what we’re trying to fix.”

No matter the zone, all re-rated flood insurance premiums will rise 8 percent, according to Christian Carter, an insurance broker with CBS/Westhampton Agency, adding that the East End’s flood maps were redrawn in 2009. Some will increase 10 percent, depending on the zone. Other will see the full 20 percent increase—or perhaps more if the home is non-conforming or a secondary residence.

“Some of my customers are definitely surprised, people who don’t file claims that have a secondary residence that is seeing a 25-percent increase,” Mr. Carter said last week during a telephone interview. “There are some ‘Why me?’ attitudes out there. But that’s what insurance is: a large group of homogeneous people and you’re all pooled together.”

On average, primary homeowners will catch a 10-percent change, as opposed to 20 percent, Mr. Carter explained. But much remains to be seen, as the reform act is so new. In fact, a number of local insurance agencies are not yet familiar with the changes, several of them explained when reached for comment last week.

“Each case is different,” Mr. Carter said of the changing rates. “My personal opinion, if someone can afford a second home on the water, that it would make sense for people with second homes to possibly see an increase, versus someone whose primary residence happens to be in a flood zone. I think that’s a valuable distinction.”

The likelihood of the increased premiums affecting secondary homeowners is slim, according to Chris Foglia, an agent with Norma Reynolds Sotheby's International Realty who is currently managing nine waterfront listings. It is the primary homeowner that should be concerned.

“This is going to affect a lot of the older families who happen to have these wonderful locations that they would never get today because the property values are ridiculous,” he said last week during a telephone interview. “It might push them out. But they would make a lot of money because of the choice location. They might have a windfall.”

But the new rates could impact how a family bids on a home, the agent said, as well as the larger picture: the real estate market as a whole. A particular listing on Quiogue that sits nearly 3 feet below the required 8-foot elevation line has seen an annual premium increase from $500 to $3,000.

“The bigger problem is, they’re expecting 20-percent increases over the next three to five years,” Mr. Foglia said. “Now, it’s $3,000. But next year, it’s $3,600. Then, $4,200. It’s exponential. This is just the tip of it.”

Over in Quogue, another home for sale is well below the mandated elevation. If prospective buyers wanted to finance the home, they would need flood insurance. Without an elevation certificate—which is a requirement at most banks today—the premium is $10,500. The premium drops to $5,000 with an elevation certificate, and down again to $1,500 if the house is lifted to code, according to Mr. Foglia.

“Certain aspects of this I think are fair, but it’s definitely hurting the older homes over the newer homes,” he said. “When they were built, they were built to code. Now, the code has changed and they’re being penalized and punished for it. That’s not fair. But for most of them, it’s just the cost of having a house out here. People are going to talk about it, think about it. But if you’re spending big money, it’s a drop in the bucket. There are only a certain number of houses on the water and there is always going to be a demand for it.”

Mr. Bishop said he isn’t taking his chances. Though he initially voted in favor of the Biggert-Waters Flood Insurance Reform Act, he is now trying to bring it to a grinding halt. A bill recently passed in House of Representatives that would stop the clock on premium increases, reverting that particular piece of the NFIP to prior law, he said.

It is still waiting on Senate approval, the lawmaker said, adding that he isn’t sure when the Senate will hear the bill but he has heard there is broad support across the aisle.

“Raising premiums to this extent is not the way to make the flood insurance fund financially viable, or more stable,” Mr. Bishop said. “One of the goals of Biggert-Waters was to bring fairness to the situation, to try to level the playing field. Look, in some cases, increases in flood insurance premiums are justified. But in others, particularly in the massive increases, it’s difficult to justify. And even if you do justify it, it would impose a real hardship on families that would have to pay it.”