If Implemented Wisely, Flood-Exposed Properties Could Benefit from Expanded Market
While lawmakers continue their struggle to agree on the long-term reauthorization of the financially burdensome National Flood Insurance Program, federal lending regulators have concluded their own six-year struggle to issue a final rule implementing the mandatory acceptance by lenders of private flood insurance as required by the last long-term reauthorization of the NFIP-the Biggert-Waters amendment. This could prove to be good news for consumers and the agents and brokers who introduce them to private flood insurance options.
The new private flood insurance rule will become effective on July 1 but is expected to be adhered to by lenders and insurers in short order as a practical matter. The mandatory acceptance provision in the new rule proclaims a breakthrough for flood insurance buyers and taxpayers, as it leaves no room for a few uninformed lenders to impede the growth of private flood insurance. If lending regulators implement the rule wisely, as it appears they will, owners of flood-exposed homes and businesses, mortgage lenders and taxpayers will benefit.
Where We Have Been
The Biggert-Waters Flood Insurance Reform Act of 2012 was designed in part to encourage the sale of private flood insurance by forcing federal lending regulators to stop years of unsanctioned actions that denied some borrowers access to better coverage and lower premiums through the private flood insurance market. Unfortunately, after being instructed by Congress to encourage growth of the private flood insurance market, these well-intended lending regulators proposed a rule in 2016 that was universally criticized by insurers, lenders and state regulators as overly burdensome and practically impossible to administer.
The proposed rule would have required lenders to warrant in writing that the subject policy agreed with the Biggert-Waters definition of private flood insurance. That definition was broadly recognized as being terribly flawed. The unpopular proposed rule was criticized as being unnecessary and redundant, as more qualified state regulators already assure that the intent of the Biggert-Waters definition is accomplished. Most crucially, the proposed rule added unnecessary cost to a lender’s acceptance of a private flood insurance policy when compared to acceptance of an NFIP policy.
For these reasons–along with the fact that the proposed rule ran counter to existing lender and regulatory norms relating to acceptance of all other forms of property insurance such as homeowners, windstorm and earthquake–the inevitable and ironic result of the proposed rule would have been the essential elimination of private flood insurance from the market. This is the exact opposite of what Congress intended.
Where We Are Going
In a triumph of common sense, federal lending regulators have included a “mandatory acceptance” provision in the final rule implementing Biggert-Waters private flood insurance provisions that requires a lender to accept private flood insurance policies containing certain characteristics and/or a specified statement demonstrating compliance. This sensible provision allows lenders to process most private flood insurance policies in the same way other types of property insurance such as homeowners, windstorm and earthquake policies are processed.
Unfortunately, as mentioned above, the final rule also contains a provision that deals with lenders’ discretionary acceptance of private flood insurance that may prove problematic for some agents and brokers and, most importantly, their flood insurance clients.
The McCarran-Ferguson Act clearly conveys regulation of private insurance to the states. The courts have ruled that very specific instruction from Congress is necessary for a federal regulator to preempt state insurance regulation. No such specific instruction relative to discretionary acceptance of flood insurance exists. So, it seems that the discretionary acceptance portion of the final rule is a solution in search of a problem.
The mandatory acceptance provision in the new rule proclaims a breakthrough for flood insurance buyers and taxpayers, as it leaves no room for a few uninformed lenders to impede the growth of private flood insurance.
Lenders have always had, and continue to have, the right of discretionary acceptance of private flood insurance policies on the same basis as they accept all other types of property insurance. Considering that Biggert-Waters only addresses the issue of what lenders must accept, not what they may discretionarily accept, the discretionary portion of the rule serves no real purpose.
If implemented wisely, the discretionary acceptance provision will have no detrimental impact on the flood insurance market. If imprudently implemented, it has the potential to inhibit the use of low-limit flood insurance endorsements, parametric flood insurance for communities and individuals and manuscript insurance policies, and may well lead to other unintended consequences.
As lending regulators take a more enlightened view, one might hope for similar thinking to be articulated by the NFIP, which continues to be under a Congressional requirement to cover the nation’s flood insurance needs through participation of the private market “to the maximum extent practicable.”
NFIP Administrator David Maurstad is well qualified, experienced and strong-minded — just the kind of person who might be able to overcome regressive elements within the NFIP that seem bent on inhibiting consumer access to private flood insurance. Roadblocks such as the “continuous coverage” rule, which penalizes a subset of consumers who wish to return to the NFIP from the private market, and the recent attempt to eviscerate a “midterm” cancellation provision for insureds wishing to cancel NFIP policies replaced by private flood, must end.
An NFIP that fights to assure access to more private market choices would save taxpayers billions of dollars.
Agents and brokers should understand that it can flood almost anywhere, and best practices demand that they offer their clients solutions responsive to this risk. Very few Americans are buying flood insurance, and if more private, as well as NFIP coverage is quoted, outcomes will improve for everyone. However, this can only happen when insurance professionals begin thinking about flood as a peril to be quoted on every property policy as a matter of standard practice, and when all attempts to inhibit the availability of private flood insurance cease.
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