Map update changes flood insurance needs for some

QUESTION: Why are some homeowners receiving letters now requesting that they need to purchase flood insurance when they never had to before?

ANSWER: Some property owners are receiving letters from their lenders notifying them that they are now required to carry flood insurance as a condition of their existing mortgage because of a recent FEMA Flood Insurance Rate Map (FIRM) change that took effect for the City and County of Ho?nolulu on Nov. 5. Prior to this date, their property’s flood zone designation was either a low-to-moderate risk (X or XS Zones) or an undetermined risk (D Zones), neither which have federal mandatory flood insurance purchase requirements. However, as a result of the Nov. 5 map update, their properties were remapped into a high-risk flood zone (A or V zone). Structures in a high-risk flood zone require mandatory flood insurance as a condition of any real estate loan through a federally regulated lending institution.

Q: Is there anything a homeowner can do to dispute the flood insurance requirement?

A: The Flood Disaster Protection Act of 1973 mandated flood insurance coverage for all federal or federally related financial assistance for the acquisition and/or construction of buildings in high-risk flood zones. This is not negotiable. However, what may be challenged are the FIRM maps. If a property owner can demonstrate through technical documentation (i.e., a survey) that their structure was inadvertently included in the high-risk flood zone, they may apply to FEMA (Federal Emergency Management Agency) for a Letter of Map Change (LOMC). If approved, the LOMC would officially revise or amend the FEMA FIRM map and remove the structure or an affected area from the high-risk flood zone.

Q: How much does flood insurance cost annually and, if it varies, what would a typical range be?

A: Flood insurance premiums vary depending upon a number of underwriting factors which include, but not limited to: the flood zone the structure is in, the age of structure, the type of construction, the elevation of the structure, and the amount of flood insurance coverage. Grandfathering is a cost-saving option that FEMA continues to offer property owners remapped into a high-risk flood zone for the first time or a higher-risk flood zone from a previous map. To learn more about this option, consult with your insurance agent.

As part of the provisions of the Homeowners Flood Insurance Affordability Act (HFIAA) of 2014, annual flood insurance premiums cannot increase more than 18 percent (with the exception of a limited category of policies that could experience up to a 25 percent annual increase). 

Here’s a sample of annual flood insurance premium estimates based on the Oct. 1 rates. However, it should be noted that on April 1, FEMA will implement new rates pursuant to HFIAA 2014.

Preferred Risk Policies (PRP): Under $500/year (B, C, X zones)

Post-FIRM structures: $1,429 (AE Zone) – 

$9,215 (VE Zone)

Pre-FIRM structures: $2,193 (AE Zone) – 

$4,711 (VE Zone)

Note: Estimates are based on the Oct. 1 FEMA flood insurance manual. Assumptions: $250,000 building coverage only (except for PRP), no basement or enclosures, single-family residence, lowest floor at 0 feet above the base flood elevation, replacement cost ratio .50 to .74 (VE zone Post-FIRM rates). Depending upon the underwriting criteria for each policy, the flood premiums could be less or more than these estimates given in the table.

Q: Can a homeowner obtain an elevation certificate to avoid paying flood insurance or to reduce the insurance premium? If so, how much would obtaining an elevation certificate cost and would it be a waste of money since FEMA already has designated the area as a flood zone?

A: An Elevation Certificate (EC) is a useful tool to determine a property’s true risk, as the EC will disclose various site elevations on the property and the elevation of the structure in comparison with the base flood elevation (BFE). The higher a structure is built above the BFE, the flood insurance premiums are reduced. If the lowest adjacent grade surrounding the structure is at or above the BFE, a property owner can apply for a FEMA Letter of Map Change to request to be removed from the high-risk flood zone. An approved LOMC would be a property owner’s best chance of having the flood insurance requirement removed by their lender. However, it is important to note that a lender has the option to require flood insurance regardless of the federal mandatory flood insurance requirements.

The cost for an EC can vary depending upon surveying company and the availability of benchmarks in the area. I’ve heard of cost ranging anywhere from $500 to $2,000. I suggest calling several local surveying companies for current quotes.

Q: Is it worth spending money on a surveyor to get an Elevation Certificate?

A: As I mentioned earlier, an EC is valuable tool in assessing a property’s true risk from flooding. For some property owners, that assessment alone is worth spending the money. However, if a property owner is only interested in getting an EC for the purpose of trying to get removed from the mandatory flood insurance requirement or lowering their flood insurance premiums, then an EC should be pursued only after careful examination of their specific situation.

A property owner should understand that unfavorable survey elevations may not result in the desired outcome. In some instances, the full risk rate for a flood policy could be far more expensive than a subsidized policy or a Preferred Risk Policy Eligibility Extension (PRPEE) policy. 

Q: What happens if a homeowner receives a letter to purchase flood insurance and doesn’t do so?

A: If the property owner receives a letter from their lender to purchase flood insurance and does not do so within 45 days, the lender will purchase coverage on behalf of the borrower.

Q: Can the lender force flood insurance on a homeowner and how much more expensive could it be than if the homeowner obtained his or her own flood insurance? Some insurance companies say it could be three times more expensive. Is that true?

A: Yes, lenders can and will force place flood insurance for a property owner. Lenders are mandated under the Flood Disaster Protection Act of 1973 to purchase coverage on behalf of the borrower, if the borrower fails to purchase flood insurance within 45 days after notification. Forced-placed flood insurance can be very expensive as lenders may not necessarily be purchasing a National Flood Insurance Policy.

Q: There have been some letters received by homeowners that say they have 45 days from the flood insurance notification date to obtain flood insurance. Is that 45-day period the same for everyone and is it flexible?

A: Yes, it is the same for everyone; unfortunately, this deadline is not flexible. As stated previously, lenders are mandated under the Flood Disaster Protection Act of 1973 to purchase coverage on behalf of the borrower, if the borrower fails to purchase flood insurance within 45 days after notification.

Q: Where can someone go online to find out more information?

A: www.floodsmart.gov or call NFIP Insurance Call Center at 800-427-4661 (3 a.m. to 3 p.m. Hawaii time).