Why Flood Policy Should Not Include Wind Coverage

By | September 19, 2008

Reuters reports that Representative Barney Frank (D – Mass.) has introduced a bill to extend the National Flood Insurance Program (NFIP) seven months beyond the scheduled September 30, 2008, expiration date to allow lawmakers to iron out “deep disagreements.”

Adding wind coverage to the NFIP’s flood policy is one of the disagreements being debated according to the article. Amendment 4719 to S.2284, which would have added wind coverage to the policy, was killed by the Senate in a 74-19 vote earlier this year; why it remains a consideration is a mystery – especially in light of the short time frame in which the congress has to work.

Arguments for adding wind coverage include removing the question of coverage (wind vs. water) following storms such as Katrina (suits still ongoing) and more recently Ike. But beyond this, there is little reason to make a move to add this coverage to the policy.

Reasons abound as to why this would not be a good move at this point; one argument is the financial problems:
• NFIP is in massive debt to the government to the tune of $18 billion. Rates were and are inadequate for the exposures insured thus the confluence of storms in 2005 put the NFIP in a deep financial hole. “Adequate” rates would be exponentially higher than current rates just to cover the flood exposure much less the rate (and resulting premium) increases that would be required to cover the wind exposure.
• The NFIP is a victim of adverse selection (link to the definition). Only those that have an absolute need for or are forced to purchase coverage do. This factor points back to the “adequate” rate problem. Fewer insureds will pay higher premiums because those that do not “have” to purchase coverage will likely drop their policy when rates are increased (resulting in more increases).
• Would carriers that currently provide their client’s wind coverage give an adequate premium credit for the removal of wind coverage from the homeowners’ or commercial property coverage to offset the additional premium required for the NFIP to provide wind protection? Not likely.

More important than the financial problems is the resulting loss of coverage. If wind coverage were picked up under the NFIP policy rather than the homeowners’ or commercial property policy insureds would suffer a distinct loss of coverage – unless the NFIP policy was completely rewritten.

Flood polices provide coverage for DIRECT loss only; there is no coverage for the cost of resulting indirect loss. What does this mean for the insureds (not an all-inclusive list, only a quick sample of the problems)?
Homeowners’ policyholders: No coverage for additional living expenses. The additional cost of living an apartment or hotel while the house is being repaired would not be covered. Nor would the increased costs of food or any other additional expenses resulting from the direct wind loss be covered.
Commercial property clients with Business Income coverage: Removing wind as a covered cause of loss in favor of being a part of the flood policy would result in NO business income coverage during the period of restoration when damage is caused by wind.

Unless the flood policy, the homeowners’ policy and the commercial property policy (or BOP) are rewritten to dovetail and fix this loss of coverage (a big gap), the effects could be financially devastating. Some questions that have to be answered include (there are probably others that will need to be answered):
• Would the wind coverage in the NFIP form apply only if flooding is also present?
• Would it be a named-storm only coverage with the primary insurer providing wind all other times?
• Would they rewrite the NFIP policy to include indirect damage coverage (back to the rate adequacy problem, how much more would have to be charged)?

Regardless, seven months is not long enough to iron out all the financial AND coverage problems that would result from adding wind to the NFIP policy. More than 30 years passed between the original proposition of Federal flood coverage until final institution of the National Flood Insurance Act of 1968; making a major overhaul in a seven-month period is too much to ask (especially with the diversion of an election).

Too many problems would be created by government’s attempt to “help.” Wind coverage should not be a part of the discussion at this point. The flood program serves the purpose it was intended to serve, providing coverage not readily available on the open market. Questions of rate adequacy, proper risk assessment (updated flood maps) and mounting debt are enough to keep the congress busy; wind coverage should not cloud the debate at this point.

More articles on flood insurance can be found at www.MyNewMarkets.com such as:
1. Midwest Flooding Prompts Flood Insurance Review
2. Flood Damage Not Limited To ‘Flood Zones’
3. Flood Coverage Forms In Participating Communities
4. Flood Policy Definitions
5. Flood Policy Terms And Conditions Unique To Coverage
6. Legislative Limits On And The Legislative Future Of The NFIP

About Christopher J. Boggs

Chris Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at chris.boggs@iiaba.net. More from Christopher J. Boggs

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