House-Passed Flood Insurance Bill Includes Windstorm, Business Interruption Options

September 28, 2007

The U.S. House of Representatives has passed a measure updating the nation’s flood insurance program that will give homeowners the option of purchasing windstorm coverage as part of their flood policy.

The legislation also reauthorizes the National Flood Insurance Program for five years through 2013, improves flood mapping, eliminates some rate subsidies, and adds business interruption coverage as an option.

H.R. 3121, the Flood Insurance Reform and Modernization Act of 2007, passed by a vote of 263 to 146.

In an effort to make the NFIP more actuarially sound, the bill phases out subsidized rates on commercial properties, vacation homes, and second homes built before 1974. Multifamily rental properties are excluded from the phase-out of the subsidy.

Additional optional policy coverage is added, allowing business owners to purchase business interruption coverage at actuarial rates. Additionally, optional coverage at actuarial rates for basement improvements and replacement cost of contents is added. For the first time since 1994, the bill updates maximum insurance coverage limits for residential and nonresidential properties.

The bill requires the Federal Emergency Management Agency to review the nation’s flood maps and makes the updating of maps an ongoing process.

Provisions protecting policyholders include clarification of disclosures about flood insurance availability and plain language information on flood insurance policies. Landlords must notify tenants of contents coverage availability. Further, the bill makes flood insurance effective immediately upon purchase of a home.

To encourage participation in the NFIP, the bill provides for a new community outreach program, and provides for a study of how to increase participation by low-income families. In order to help ensure that those homeowners who should have flood insurance do have flood insurance, the bill increases the fines on lenders who do not enforce the mandatory flood insurance policy purchase requirement for those who live in a floodplain and hold a federally-backed mortgage.

H.R. 1852 also requires FEMA to report to Congress annually on the financial status of the NFIP, increases the amount FEMA can raise policy rates in any given year from 10 percent to 15 percent, and authorizes funding for additional staff at FEMA to carry out the requirements of this bill.

The House measure includes a provision authored by Rep. Gene Taylor of Mississippi to provide for an optional multiple peril policy – to allow property owners to purchase wind and flood coverage in a single policy. The industry has opposed this expansion of coverage.

“Passage of this legislation will ensure that in future disasters homeowners won’t have to hire lawyers, engineers, and public adjusters to prove what damage was caused by wind and what was caused by flooding,” said Rep. Taylor, a co-sponsor of the bill.

“Flood insurance reforms are needed because, as we have seen, storms will become stronger and more intense, and we need a program that can contend with the worst that Mother Nature can throw at us,” said Rep. Maxine Waters, D-Calif., chairwoman of the Financial Services Subcommittee on Housing and Community Opportunity and sponsor of H.R. 3121. “Simply put, we cannot let another hurricane season pass without putting the National Flood Insurance Program on solid footing.”

Insurance agents welcomed news of the House approval.

The Independent Insurance Agents and Brokers of America said it is especially pleased with the provisions that increase maximum coverage limits and include optional business interruption coverage and additional living expenses.

“An increase in the maximum coverage limits will better allow both individuals and commercial businesses to insure against the damages that massive flooding can cause, and we’re grateful that this increase was included,” said John Prible, Big “I” assistant vice president for federal government affairs. “We are also grateful that the House included the optional additional living expenses and business interruption. The security and stability that these optional purchases would provide to consumers is crucial to individuals and to small business people across America.”

Agents and insurers were less enthusiastic about Taylor’s windstorm provision, however.

The Big “I” said only that it has “some concerns with the inclusion of such coverage in the NFIP.” The group said it would work to “ensure that windstorm coverage is affordable and available to Big “I” consumers without unduly displacing the private marketplace.”

The National Association of Professional Insurance Agents said the windstorm coverage should be eliminated from the legislation when the Senate considers it.

“Adding wind coverage to the National Flood Insurance Program (NFIP) is a bad idea that we oppose,” said PIA Senior Vice President Patricia A. Borowski. “It would result in uncertainty as to whether losses caused by wind should be covered by a policyholder’s property policy, a state’s wind pool, or the NFIP. The muddle created by this provision will increase disputes about coverage and prompt more lawsuits. It would hurt, not help homeowners.”

That reasonming echoed what some insurers have said.

The Property Casualty Insurers Association of America opposes the windstorm option, arguing that while it is “well-intentioned, it may produce unintended negative consequences” for consumers.

“Adding wind coverage will create artificial subsidies, which essentially means rate hikes for consumers in non-coastal parts of the country who do not face the same wind-damage risks as coastal policyholders,” said Ben McKay, PCI’s senior vice president, federal government affairs. “It is unnecessary for Congress to expand the flood program, considering that wind coverage is already available either through the private sector or state wind insurance programs.”

McKay said that residual state-based mechanisms provide coverage for wind damage where no market exists, and private insurers provide wind coverage where there is a market. “Adding wind coverage to the NFIP simply creates a federal government fund that will compete with existing state funds and potentially with the private market,” he added.

PCI urged the Senate to pass flood legislation that does not include the wind provision.

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