Flood Insurance Premium Increases And Increased Cost of Compliance Eligibility

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1 Flood Insurance Premium Increases And Increased Cost of Compliance Eligibility January 11, 2015 (This document is updated frequently, so please consult the most recent edition) Margaret Becker Director of Disaster Recovery and Community Development Legal Services NYC 40 Worth Street, Suite 606 New York, NY

2 Information on many of these topics as well as individual properties is available at floodhelpny.org 2

3 Table of Contents Who Is Required to Carry Flood Insurance and How Much? p. 4 What Premium Increases Can Homeowners Expect? p. 7 Table of Sample Full Risk-Premiums for Un-elevated Homes p. 8 How Quickly Will the Full-Risk Rates Come? p. 10 Examples of HFIAA rate increases at 15% and 18% p. 11 Estimated loss of home value without elevation p. 12 Reasons Homeowners May Resist or Reject Elevating Their Homes p. 13 What Is An Elevation Certificate and How to Get One? p. 14 Is There Some Way to Estimate A Home s Elevation without Hiring a Surveyor? p. 14 The Problem of Elevated Homes Where the Lowest Floor Has Been Converted p. 17 Increased Cost of Compliance Coverage and Eligibility p. 18 3

4 Regardless of any requirements: Who Is Required to Carry Flood Insurance and How Much? Anyone at risk of flooding should ideally carry enough flood insurance to cover the cost of rebuilding the home if it is destroyed, up to the maximum policy amount of $250,000. If the home is newer construction and is unlikely to be completely destroyed, it may be adequate to purchase enough flood insurance to cover significant damage to the home up to the base flood elevation plus 2 feet. For example, if the home only had $100,000 in damage after Sandy, maybe that is a good ballpark for the amount of coverage to buy, if a full $250,000 policy isn t affordable. IMPORTANT: If the home isn t insured for at least 80% of the cost of replacing the structure, the homeowner will only be paid for actual cash value for the loss rather than replacement cost value. (See fuller explanation below.) Additional coverage for contents is recommended. Bear in mind that most contents in a basement will not be covered. The following are minimum requirements. More than one of these requirements may apply to a homeowner. The homeowner must meet the highest of the requirements. People who received assistance from FEMA's Individual and Household Assistance Program ( IA or IHP ): Must purchase coverage for at least the FEMA grant the homeowner (or renter) received. Recipients of FEMA aid who do not purchase flood insurance and who apply for FEMA Assistance for a subsequent disaster will be ineligible to receive FEMA help for any repair/rebuild needs and will be ineligible for any form of federal repair/rebuild needs (like Build It Back). The flood insurance purchase requirement stays forever. The requirement sticks to the address, even if the property is demolished and a new structure is built. Homeowners must inform future buyers of the requirement to maintain insurance. People with a mortgage: If the client has a mortgage and lives in a special flood hazard zone (A, AE, or V), she must maintain flood insurance up to the amount of the outstanding balance on the mortgage, or the maximum policy amount of $250,000 for the structure, whichever is less. * The requirement ends when the principal balance of the mortgage is paid off. If the homeowner does not purchase flood insurance, the mortgage servicer is likely to force place insurance on the property and pass the cost on to the homeowner by increasing the escrow portion of the monthly mortgage payment. * Current legislation only mandates flood insurance for federally insured mortgages (e.g. Fannie, Freddie, FHA, or VA), but most mortgage companies will require flood insurance to protect their interest in the property. 4

5 Force-placed insurance is often more expensive than homeowner-purchased insurance and often gives the homeowner less protection than a policy purchased by the homeowner. Mortgage servicers are penalized if they do not enforce this insurance requirement, which is why servicers force place flood insurance. Recipients of Small Business Administration (SBA) loans: Must purchase flood insurance up to the market value of the structure (not including the land) or the National Flood Insurance Program (NFIP) maximum of $250,000, whichever is less. Since the SBA loan is considered disaster assistance, the current homeowner or the future purchaser of the property must maintain at least the FEMA aide maximum (currently $32,400), even after the SBA loan is paid off. As with mortgage servicers, SBA will force place insurance on the property, if the homeowner does not purchase a policy while the SBA loan is in repayment. Failure to comply may make the homeowner ineligible for any form of federal assistance for damage to the structure. Recipients of Build It Back assistance: Recipients whose property is in a flood hazard zone must maintain flood insurance up to the Build It Back grant amount, or the maximum flood insurance policy ($250,000), whichever is less. Since the requirement comes from the use of federal funds (Community Development Block Grant- Disaster Recovery), the requirement is permanent and attaches to the property, though the amount of insurance required on an ongoing basis has not been clarified. Sellers must disclose the requirement to subsequent purchasers. Failure to purchase flood insurance will make the homeowner ineligible for any future federal flood assistance (FEMA, SBA, CDBG-DR). 5

6 How do I know the value of the structure separate from the land? Don t try to guess! The New York City Department of Finance has these figures, but accessing them is not simple. The Build It Back program has or can get this information for all those who have registered. Call Build It Back and ask for the value of the land and the value of the structure. The examples below come from Department of Finance figures, and may not be accurate. Midland Beach home built in 1960 Total value (land and structure): $287,000 Value of structure alone (pre-storm): $130,000 (45%) Oakwood Beach home built in 1970 Total value (land and structure): $360,000 Value of structure alone (pre-storm): $150,000 (42%) South Beach home built in 2002 Total value (land and structure): $347,000 Value of structure alone (pre-storm): $280,000 (81%) New Dorp Beach home built in 1925 Total value (land and structure): $388,000 Value of structure alone (pre-storm): $205,000 (53%) Rockaway Park home built in 1987 Total value (land and structure): $624,000 Value of structure alone (pre-storm): $251,000 (40%) Purchasing a policy for less than 80% of the replacement cost of the structure will mean a smaller insurance payout. Only applies to single-family homes, not 2- or more unit homes. The replacement cost of the structure is not necessarily the same as the current value of the structure in the examples above. If a homeowner purchases a building policy for less than 80 percent of the full replacement cost of the building the cost to build the home again from the ground up the insurer will only pay for actual cash value of the loss, not replacement cost value. Examples of the difference between actual cash value (ACV) and replacement cost value (RCV): On a claim for $250,000, the difference was about $29,000 On a claim for $198,000, the difference was about $26,500 On a claim for $43,000, the difference was about $8,400 On a claim for $37,000, the difference was about $3,700 These are examples only. The difference in any given claim depends on what was damaged, because depreciation rates vary. For example, drywall depreciates differently than a floor joist does. 6

7 What Premium Increases Can Homeowners Expect? Legislative Background: Many homeowners in flood hazard zones have been paying artificially low, subsidized flood insurance rates. After Hurricane Katrina, FEMA went $18 Billion in debt. The Biggert-Waters Act of 2012 sought to address this by requiring that all flood insurance policies paid premiums commensurate with the property s risk, and it mandated that these new, often much higher rates be phased in rapidly. Due to the devastating affect that these premium increases would have on many coastal homeowners, in 2013 congress enacted the Homeowners Flood Insurance Affordability Act (HFIAA). The HFIAA slowed the phase-in of full risk rates, but it did not stop the rate increases. Factors That Affect the Rate: Flood Hazard Zone The Flood Insurance Rate Map (FIRM) in New York is changing: a homeowner s current zone may not be his zone in Advocates and homeowners can find out the home s current and future (preliminary FIRM) flood zone by going to: floodhelpny.org Region2coastal.com New York City is likely to adopt the preliminary FIRM maps in the spring of 2016, at which point the new flood zones and elevation standards will take effect. Property Features How far below (or above) the Base Flood Elevation (BFE) the home s lowest floor is. o BFE is measured against sea level, not the surrounding ground. o BFE is measured from the top of the "floor of the lowest floor. (NFIP uses two different meanings of the word floor. ) o Top of the floor means where your rug lies o Lowest floor means the lowest story. o BFE is measured from the top of the floor of the lowest story. Basements count! Any basement, finished or unfinished. The floor of the basement is where the home s elevation will be measured from. However, the rates account for the fact that the lowest floor is a basement (and therefore has limited coverage). In elevated homes, the enclosure below the elevation should not be finished : must have less than 20 linear feet of drywall. Raising utilities can reduce the rate, but not dramatically. 7

8 What Will Full Risk Rates Look Like? Homeowners who remain in an X zone when the pre-firm maps take effect will not see significant premium increases. Homeowners whose homes are elevated above the new Base Flood Elevations (BFE) will see rates comparable to those in the X zone (about $500). Values below are for $200,000 structure coverage, $80,000 personal propert, $2,000 deductible, and a 1-4 family home Zone Basement Elevation relative to BFE Full-Risk Annual Premium AE No 0 feet $1,722 AE No -4 feet $9,995 AE Yes -5 feet $4,100 AE Yes -9 feet $8,045 AE Yes -13 $16,291 VE No 0 feet $4,297 VE No -4 feet $23,244 The rates for homes with basements are different from the rates of homes without basements, so it is critical that the homeowner pay attention to the basement/no basement differences when comparing the home to the rate examples. The above table gives examples only for un-elevated homes. Homes that are elevated but still below the BFE receive different rating treatment. None of the above examples apply to elevated home premiums. 8

9 Source: A Stronger, More Resilient New York/FEMA 9

10 How Quickly Will the Full-Risk Rates Come? The following describes the current status of the law, under the HFIAA. Congress could change the law at any time. Congress is under pressure to stop FEMA s ongoing fall deeper into debt, and therefore could revisit the issue of flood insurance premiums at any time. 1-4 family homeowners (primary residence) without severe repetitive loss : Annual rate increases are capped at 15%-18% of the current premium. Homes that are moving from low- to high-risk zones can purchase preferred risk rate for 1 st year, and benefit from 18% cap in subsequent years. Homeowners purchasing flood insurance for the first time in a high-risk zone can purchase at the rate of a prior, pre-firm policy (for now), and benefit from 18% increase cap in subsequent years. New purchasers will get the benefit of an 18% rate increase cap. The regulations indicate that these caps on annual increases apply to a residence, not your residence, suggesting that residential rental properties are covered by the caps. However, the caps do not apply to second homes, such as vacation homes. Severe repetitive loss properties: Severe repetitive loss means a property: (a) that has at least four NFIP claim payments (including building and contents) over $5,000 each, and the cumulative amount of such claims payments exceeds $20,000; or (b) for which at least two separate claims payments (building payments only) have been made with the cumulative amount of the building portion of such claims exceeding the market value of the building. (c) For both (a) and (b) above, at least two of the referenced claims must have occurred within any ten-year period, and must be greater than 10 days apart. Not protected by HFIAA delay in rate increases. Annual premium increase of 25% of the full risk rate until the full risk rate is reached. Rate increases began on October 1, Second Homes and Businesses: Not protected by HFIAA Rate increases began in 2013 Annual premium increase of 25% of the full risk rate until the full risk rate is reached. 10

11 Examples of HFIAA rate increases at 15% and 18%, starting from premiums of $1800 or $500 Generally, Pre-FIRM (built before 1987) will see 15% annual increase Post-FIRM (built after 1987) will see 18% annual increase. 15% per year 18% per year Annual premium Monthly premium Annual Premium Monthly Premium current $ 1, $ year 1 $ 2, $ $ 2,124 $ 177 year 2 $ 2, $ $ 2506 $ 209 year 3 $ 2, $ $ 2,957 $ 246 year 4 $ 3, $ $ 3,490 $ 291 year 5 $ 3, $ $ 4,118 $ 343 year 6 $ 4, $ $ 4,859 $ 405 year 7 $ 4, $ $ 5,733 $ 478 year 8 $ 5, $ $ 6,765 $ 564 year 9 $ 6, $ $ 7,984 $ 665 year 10 $ 7, $ $ 9,421 $ 785 year 11 $ 8, $ $ 11,117 $ 926 year 12 $ 9, $ $ 13,118 $ 1,093 year 13 $11, $ $ 15,479 $ 1,290 and so on until the full-risk rate is reached. 15% per year 18% per year Annual premium Monthly premium Annual Premium Monthly Premium current $ 500 $ 42 year 1 $ 575 $ 48 $ 590 $ 49 year 2 $ 661 $ 55 $ 696 $ 58 year 3 $ 760 $ 63 $ 822 $ 69 year 4 $ 875 $ 73 $ 969 $ 81 year 5 $ 1,006 $ 84 $ 1,144 $ 95 year 6 $ 1,157 $ 96 $ 1,350 $ 113 year 7 $ 1,330 $ 111 $ 1,592 $ 133 year 8 $ 1,530 $ 128 $ 1,879 $ 157 year 9 $ 1,759 $ 147 $ 2,217 $ 185 year 10 $ 2,023 $ 169 $ 2,617 $ 218 year 11 $ 2,326 $ 194 $ 3,088 $ 257 year 12 $ 2,675 $ 223 $ 3,644 $ 304 year 13 $ 3,076 $ 256 $ 4,300 $ 383 and so on until the full-risk rate is reached Remember, the rate increases will stop once the homeowner reaches the full-risk rate. 11

12 Estimated loss of home value without elevation. Those who chose not to elevate their homes should be aware that their homes will lose value as a result. A home with a $5,000-$10,000 annual flood insurance premium may be hard to sell at anything close to its pre-sandy value, or even its value today. A $500 flood insurance premium increase is estimated to cause a $10,000 decrease in home value. Each $5,000 premium increase could lead to a $100,000 loss in value. 12

13 Reasons Homeowners May Resist or Reject Elevating Their Homes Home elevation is the single most effective way for homeowners to reduce their flood insurance premiums. Homeowners may have any or all of the following reasons for opposing elevation of their homes. Some of these statements are based on lack of information, but some involve difficult balancing of valid priorities: A storm like Sandy isn t going to happen again. Flood insurance premiums are increasing, whether another storm like Sandy happens or not. Any homeowner with a mortgage will have no choice about carrying flood insurance: if the homeowner does not purchase flood insurance, the mortgage bank will purchase it and add the cost to the monthly mortgage bill. I can t climb stairs. Lifts can be installed. However, homeowners who do not feel comfortable with a lift may want to have the home elevated to preserve its value then sell it and relocate. I can handle flooding: I don t need to elevate. This is an option for anyone who does not have a mortgage (and therefore will not have flood insurance forceplaced by the bank). However, the home s value will drop by approximately $10,000 for every $500 increase in flood insurance costs. A $5,000 premium increase could lead to a $100,000 loss in value. I don t want to lose my basement room. The homeowner will lose the basement room. The homeowner in this circumstance must weigh the loss of that space against the burden of a $5,000-$10,000 annual flood insurance bill and a $100,000-$200,000 loss in the home s value. I don t want to waste all the repair work I ve done already. The homeowner must weigh the value of what would be lost (depending on the type of elevation) against the cost of not elevating (high insurance premiums and loss of home value). I have no money to elevate my home. Most homeowners in the high-risk flood zones face this problem. There is no solution currently. Very few homes are eligible for Build It Back elevation or ICC claims. The federal government stopped the flood insurance rate increases. The 2014 legislation (HFIAA) slowed the rate of the premium increases but did not stop them. I can t afford temporary rent while I am displaced during the elevation process. Build It Back is providing temporary rent in some circumstances. Otherwise, there is no solution to this problem. I need Build It Back reimbursement, and I can t get reimbursement on an elevation pathway. This is true. The homeowner must weigh the long-term value of elevation against the need for reimbursement. My home can t be elevated (old home, attached home, etc.). There are solutions. Attached homes can be elevated by means adding an additional floor on top of the building and converting the lowest floor to storage or a garage. I m exhausted. Yes. 13

14 What Is An Elevation Certificate and How to Get One? An elevation certificate states the elevation of the home s lowest inhabited floor above sea level. Homeowners in high-risk flood zones who do not already have an elevation certificate will need one to purchase a new flood insurance policy or renew a current one. An elevation certificate must be prepared by a surveyor or engineer and costs $500-$800, possibly more. Is There Some Way to Estimate a Home s Elevation without Hiring a Surveyor? A Build It Back Feasibility Determination Report gives enough information about a property to derive a ballpark estimate of the home s current elevation. Homeowners cannot rely on this as an accurate determination of the home s elevation. There are variables that could alter the estimate by several feet. However, this information can give the homeowner a rough idea of the home s current elevation. Since everyone in a Special Flood Hazard Zone will have to get an elevation certificate in order to continue their flood insurance, we recommend that homeowners hire a professional to determine accurately the home s elevation. Not all homeowners in Build It Back have reached the feasibility report stage, but many have. Homeowners should ask Build It Back for a copy of the Report, if they have not already received it. Homeowners working with advocates in the Build It Back counseling program can ask their advocate to download a copy of the Report for them. The first page of the Feasibility Determination Report states the homes flood zone (SFHA), base flood elevation (BFE), lowest adjacent grade (LAG), and height of the first floor above ground (FFAG). The illustration on the following page shows you where to find this information on the Report. You must also know whether the home has a basement or cellar. This information is directly above the SFHA box, highlighted in yellow on the attached sample. It makes no difference whether the below ground space is a basement or a cellar: both have the same effect on the home s elevation. (Crawlspaces are different, however.) To calculate the elevation of a home with a basement or cellar, you need to know (or approximate) the height of the basement or cellar. If you do not know the height, you can use 7 feet as a guess. Again, this is a rough estimate. This information is on every feasibility report, regardless of whether the home is in a repair and elevation track or simply a moderate rehabilitation track. 14

15 Flood Zone (Special Flood Hazard Area) Base Flood Elevation (future FEMA required home elevation, based in preliminary maps. These elevation requirements should take effect in early 2016) Lowest Adjacent Grade (height of ground around home) First Floor Above Ground (distance between the lowest ground point near the building and the bottom of the first floor above ground) 15

16 Using the information from the sample Feasibility Determination Report, we can estimate that this home is roughly 8 feet below BFE, including the basement. BFE=12 LAG=8.97 (We ll round up to 9 ) FFAG=2 Home has a cellar. We will assume the cellar has a 7 ceiling. The home has more than 1 floor. (Rates for single and multi-story buildings differ significantly) The elevation of the home is measured from the floor (where the rug lies) of the basement, relative to sea level. You can derive an estimate of this in several steps: 1. To determine where the floor of the basement lies relative to the ground (LAG), use the following equation: 7 (ceiling height) 2 (FFAG) = 5 2. To determine where the floor of the basement lies relative to sea level, use the following equation: 9 (LAG) 5 (basement depth below ground) = 4 3. We now know that the lowest level (basement floor) of the home is 4 above sea level. 4. The elevation requirement (BFE) for the home is (BFE) 4 (basement floor relative to sea level) = 8 5. Therefore, the home s current elevation is roughly 8 below BFE, or -8. To get a rough sense of what the full-risk insurance premium will be, find one of the examples that most closely matches the home s relevant characteristics: 8 feet below BFE with a basement. The homeowner s full-risk premium in AE zone at -8 and basement = approximately $6,000/year. The rates for homes with basements are different from the rates of homes without basements, so it is critical that the homeowner pay attention to the basement/no basement differences when comparing the home to the rate examples. Assumes that she raises her utilities out of the cellar. Leaving utilities in the cellar will raise the annual premium by a few hundred dollars. 16

17 The Problem of Elevated Homes Where the Lowest Floor Has Been Converted Many newer homes in the current flood zone were built as elevated homes. This applies to many Post-FIRM homes, which were built after 1987 when the first flood rate maps (FIRMs) were adopted. Many of these homes were later converted to make living quarters on the ground floor, which was formerly an unfinished garage or other non-living space. In some cases, the conversion was done by the current owner. In other cases, the current homeowner purchased the home believing that the converted ground floor complied with building codes (which it did not). In either case, the floor (where the rug lies) of the converted ground floor will be the point at which the home s elevation will be measured for purposes of flood insurance premiums. The home s Certificate of Occupancy (available from the buildings department) will indicate whether the lowest floor was supposed to be living quarters or not. A garage door on the front of a non-garage space is an indication that the floor has been converted. If a building located in an A zone has an enclosure below the elevated floor, including an attached garage, the enclosure or garage floor becomes the lowest floor for rating when any of the following conditions exists: The enclosed space is finished (having more than 20 linear feet of interior finished wall; or The unfinished enclosed space is used for other than building access (stairwells, elevators, etc.), parking, or storage; or The unfinished enclosed space has no proper openings (i.e. flood vents to let water flow out). Some homes with converted ground floors may not need to be further elevated: The good news is that homeowners with converted ground floors may not have to physically elevate the home to meet current BFE requirements. If the original lowest floor for living space (above the garage floor) is already at or above the new BFE, the homeowner can restore the ground floor to its original purpose (i.e. remove the finishing) and pay low flood insurance premiums. This is much cheaper than elevating the home. The bad news is that the homeowner will lose the lowest floor as living space. Is it possible to leave the finishing in place on the ground floor and still use the higher floor as the home s elevation point, for purposes of flood insurance rating? According to NFIP regulation, no. In the past, NFIP has not always checked whether the ground floors of elevated homes were finished. Many people received flood insurance payments after Sandy for losses in converted ground floors. This may not continue, and cannot be relied on in any event. Be aware, though, that a homeowner who receives a policy that is rated as an elevated home, despite a finished ground floor, will have very limited coverage for any loss below the elevated floor. 17

18 Increased Cost of Compliance Coverage and Eligibility The National Flood Insurance Program (NFIP) standard flood insurance policy, which the vast majority of flood insured homeowners have, includes coverage for some homeowners to pay for some of the cost of home elevation. The coverage is called Increased Cost of Compliance (ICC). Coverage: Up to $30,000. Subject to $250,000 maximum NFIP pay-out. Available only to homeowners whose homes were substantially damaged (50% or more of the structure value) or have a repetitive loss structure (2 flood damage claims during a 10-year period which combined reached 50% or more of the structure value). The 50% damage threshold includes only flood damage, not flood and wind combined. Examples: Homeowner A has $250,000 in building coverage under her flood insurance policy. She received $200,000 payment for Sandy damage to her home. Her home (structure only) is valued at $120,000. She is eligible for ICC. Homeowner B has $200,000 in building coverage and received $200,000 in flood insurance payment for Sandy damage, which is greater than 50% of the structure value. He is eligible for an additional $30,000 from ICC. Homeowner C has $250,000 in building coverage and received $230,000 in insurance payment. She is eligible for $20,000 in ICC coverage. Deadline to complete mitigation work for an ICC claim: October 28, 2016 (Four years from loss) The standard flood insurance policy states that an ICC claim must be filed and work completed within 2 years of the date of loss, but that deadline was extended to 4 years by FEMA Bulletin W (February 11, 2013). 18