Phaseout of policy to sting owners

More than 2,000 Rhode Island property owners, many whose houses or businesses came through Hurricane Sandy and the 2010 floods without a scratch, are now feeling the effects of those and other devastating storms.
Starting next month, the flood-insurance premiums they pay on their vacation homes and buildings will rise steeply in each of the next four years, in many cases costing them thousands of dollars annually.
The catalyst for the hikes is $24 billion in red ink weighing down the National Flood Insurance Program, which has been hammered by a steady stream of severe storms starting with Hurricane Katrina in 2005.
Since federal flood maps were created in the 1970s and 1980s, buildings built before then were eligible for vastly cheaper policies than those available for new buildings.
But to stop the program’s losses and reduce the taxpayer subsidy going to waterfront homeowners, Congress last year passed the Biggert-Waters Flood Insurance Reform Act, which begins phasing out cheaper policies for older properties, starting this fall with vacation homes, businesses and sites of repeat flooding.
For properties cut off from the lower rates, premiums will rise 25 percent each year until they reach the full-risk, or unsubsidized, rate, which will vary depending on factors such as the building’s elevation and vulnerability.
“If people are on fixed incomes, it could become burdensome,” said Michelle Burnett, National Flood Insurance Program coordinator for the R.I. Emergency Management Agency. “People could potentially lose their homes.”
For now, the cheaper policies for older houses will remain if they serve as a primary residence, meaning the person living there, owner or renter, spends at least 80 percent of the year there.
However, once any property in a flood zone is sold, primary residence or not, it is subject to the same premium increases as the commercial, vacation and repeat-claims buildings.
That’s sent a current of fear and uncertainty through the real estate market, especially in low-lying or coastal areas.
The owners of buildings without mortgages have the option of going without flood insurance, and taking on the risk of loss, if they can’t afford the new premiums, but lenders require flood insurance for mortgages on properties within a flood zone and there is no private underwriter. Bruce Lane, broker-owner of Williams & Stuart Real Estate in Cranston, recently witnessed the consequences of the insurance changes in an aborted sale in North Kingstown.
He represented the seller of a home near Bissel Cove that was owned outright and, although in a flood zone, had been occupied for years without an insurance policy.
When an agreement was reached with the buyer for $245,000, they found out it would cost more than $25,000 per year to insure and the bank would not provide a mortgage without insurance.
The deal fell apart with the buyer losing her deposit.
“In our office we are on guard for any properties in a flood zone, even ones you may not have thought were in a flood zone,” Lane said. “Even if it is not near the water, as a buyer’s agent you have to be doing extra due diligence that you are not in a hazard zone.”
Along with clients, Lane has been hit by the changes himself as the insurance on a rental property he owns on Aqueduct Road in Cranston has spiked from $1,780 to $2,400.
“That’s something you can’t just pass on to the tenants,” Lane said.
In addition to the premium subsidy cutbacks, the National Flood Insurance Program is also seeing flood maps redrawn to reflect more advanced environmental modeling and newer data that includes the recent storms.
The new maps, which have been released county-by-county this year, in many cases see flood-hazard zones enlarged.
To find out how the changes have affected them, anyone with flood insurance, in a flood zone or on the edge of one, is advised to have an elevation survey done of their property to determine how far the lowest floor is from the flood plain. The resulting “elevation certificate,” which costs about $500, is then used by insurance agents to come up with a policy quote.
Susan Arnold, CEO and chief counsel for the Rhode Island Association of Realtors, said real estate agents across the country have been alarmed at the size of the premium increases being quoted for flood insurance.
“You don’t know if you are in a flood zone unless you have a licensed surveyor come out, and there are people who never knew they were in a flood zone or weren’t under the old map who are now,” Arnold said. “There are some homes that won’t be covered at all. Then what happens? There will be homes out of mortgage compliance and lenders could foreclose.” Arnold said when Congress approved the changes last year, they included a premium study, but it was never conducted because of federal spending cuts known as “the sequester.”
She said the Realtors association would support a moratorium on the changes until the affordability study is done.
While hurricanes have prompted people to associate high flood risk with the coast, Arnold said the flood-zone changes and premium increases are happening all over the state, including places far from the beach.
According to Burnett at RIEMA, who is leading the effort to educate residents about the flood-insurance changes, about 2,100 properties in Rhode Island are expected to lose their grandfathered rates Oct. 1 when the changes go into effect. (That doesn’t count changes triggered by sales.)
Of that total, approximately 1,400 are secondary homes, 700 are businesses and 33 are repeat flood sites where there have been at least four claims of at least $5,000.
But as large as the change is, Burnett said there are still 6,755 primary residences in Rhode Island that will be paying the subsidized flood-insurance premium into next year.
In the long run, with sea levels rising and storm-surge damage becoming more common, FEMA is moving toward making all property owners in flood zones pay as close to the true actuarial cost of their insurance as possible.
Starting in 2014, Burnett said FEMA is going to be taking a look at ways to reduce the subsidy for primary residences as well, prompting even greater problems for residents and the real estate market.
“I think the goal is to phase out certain types of grandfathering, which could affect primary residences in 2014,” Burnett said.
At OceanPoint Insurance Agency in Middletown, President and CEO Doug Mayhew said his agents have been busy this fall answering calls from prospective buyers wanting to know about the new flood maps, and working through surveys and quotes for owners facing steep premium hikes.
“Eventually this will drive property owners to consider things that can be done that will lower the risk of a flooding event,” Mayhew said. “If they are thinking of remodeling or putting any investment in, they are also thinking about raising mechanicals above the base flood elevation or raising the elevation of the house.” •

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