New law eases flood insurance rules

Buyers balked at flood insurance rates for this James Street property.

Buyers balked at flood insurance rates for this James Street property.

When Fairfield real estate agent Marjorie Judge put her client’s James Street colonial up for sale last January, she didn’t realize that insurance rate hikes brought about by recent changes to the National Flood Insurance Program would send buyers running scared.

“It was a lovely little house, but people couldn’t afford the insurance,” said Judge.

After 108 days on the market, the house sold to a developer in May for $415,000 — exactly $100,000 less than the original asking price.
“Without the storm,” Judge said, the property “would have sold for $450,000 right out of the door.”

Homeowners, and especially sellers like Judge’s client, have found themselves storm tossed — not only by Sandy, which according to Fairfield Zoning Department Assistant Director Jim Wendt flooded approximately 2,200 properties in town — but by a recent federal law and new mapping by the Federal Emergency Management Agency (FEMA) that increased premium rates under the program. Additional legislation signed into law in March lessened the severity of the rate hikes but added to confusion surrounding the issue.

National flood insurance

In 1968, Congress established the National Flood Insurance Program when private insurers largely abandoned the risky flood insurance market. The program struck a bargain: in exchange for residents’ access to affordable insurance “against the perils of flood losses,” participating communities would have to adopt and enforce FEMA building rules as part of their local ordinances. Buildings constructed before the date the community joined the program, and thus before a Flood Insurance Rate Map went into effect for that area, FEMA calls “pre-FIRM.”  Pre-FIRM properties were not subject to FEMA’s flood mitigation requirements, such as increased elevation and venting, that applied to “post-FIRM” construction after the community joined the program — in Fairfield’s case, 1978.

As many Fairfield homeowners in the beach area have learned, the exemption from FEMA rules vanishes for pre-FIRM buildings once there is “substantial improvement” equaling 50 percent of the structure’s value. At that point, post-FIRM building regulations — including those governing elevation — apply, Wendt said, and the town won’t issue a permit to construct unless they are met.

According to Diane Ifkovic, environmental analyst and National Flood Insurance Program Coordinator with the Connecticut Department of Energy and Environmental Protection, there are 2,849 properties insured under the program in Fairfield, most of which —2,197— are pre-FIRM buildings paying a subsidized rate that is lower than the true actuarial rate for their property. Ifkovic explained the rationale behind the special treatment of pre-FIRM houses: “Whether they were built in the ’50s, or ’60s, or 1776 … they were built with no data, so it wasn’t fair to charge them the real rate.” Besides addressing the issue of fairness, the pre-FIRM subsidy also encouraged communities to participate in the program, mitigating their potential losses “by adopting FEMA’s flood-plain management requirements,” Connecticut Congressman Jim Himes said in March.

Under the program, private insurance companies write and service the policies, but FEMA sets the rates and pays the claims.

“Everything went fine,” said Southport insurance agency owner Tim Russell, until a series of big storms began to hit, starting with Hurricane Andrew in 1992 and exacerbated by Hurricane Ivan in 2004 and hurricanes Wilma and Katrina in 2005. Compounding the problem of severe storms, said Russell, who is also Government Affairs Committee chairman for the National Association of Professional Insurance Agents, was the increase in waterfront building since the program’s inception, which also led to more claims.

With no cash reserve built into the program, “there was not enough money in the pot to pay the unexpected increase in losses,” said Russell. “They had to borrow from the U.S. Fed,” he said, and “about 50 cents of every premium dollar was spent to service the debt,” which eventually grew to approximately $30 billion.

Ifkovic agreed that after Katrina, the program “just couldn’t absorb the money anymore. They had hoped that more people would have brought their houses into compliance, but that just didn’t happen.” After “40-plus years of the same formula,” Ifkovic said, it “wasn’t a sustainable program.”
The legislative fix

To make the program more financially stable, Congress passed the Biggert-Waters Act, which went into effect in October 2014, almost exactly one year after Superstorm Sandy struck Fairfield Beach. The law aimed to eliminate flood insurance subsidies, forcing people to pay an actuarially sound rate. According to Russell, under the act, homeowners could keep their subsidized rates for their pre-FIRM primary residences until they were sold, but buyers of these properties faced the full actuarial rate, which in Fairfield “went up to $40,000-$50,000,” in some cases, he said. Russell saw clients pass on buying such properties.

Bob Stone, Fairfield Board of Realtors president, also witnessed the law’s effect on home sales, noting, “Some people wanted nothing to do with the beach area.” Stone said he lost one sale when buyers “couldn’t get a definitive answer about whether they would be grandfathered” under the seller’s rate. Those buyers, Stone said, opted to buy a house elsewhere, “away from the water.”

Stone and Russell both saw buyers putting their money toward houses with larger mortgages, rather than into pricey flood insurance.
Buildings categorized as “severe repetitive loss properties,” of which Fairfield has 205, according to Ifkovic, along with properties that were not primary residences, were treated even more harshly under the Biggert-Waters law, facing rate increases of up to 25 percent per year.

“Biggert-Waters was too much, too quickly,” said Ifkovic, noting that Congress was hit immediately with complaints from constituents and real estate agents.


Fairfielders dealing with the after-effects of Sandy and higher rates under the Biggert-Waters Act faced a third flood-insurance-related hurdle: a new FEMA map, which went into effect in July of 2013.

Under the new map, “most of Fairfield Beach Road from the Seagrape west is now in a V zone instead of an A zone,” said Russell, explaining that V represents a high-risk category, while A denotes only a moderate risk. After the map took effect, people who owned property there became subject to “higher premiums because of the map change, in addition to premium changes,” Russell said.

Fixing the fix

In response to the negative reaction to premium hikes, Congress passed the Homeowner Flood Insurance Affordability Act, which President Obama signed into law in March.

The new act rolls back some, but not all, of the rate hikes put in place by Biggert-Waters. Most importantly for Connecticut, said Ifkovic, buyers of pre-FIRM primary residences can keep the seller’s old, subsidized rate.  However, these policies will increase each year, at a minimum rate of five percent and a maximum rate of 18 percent, until they reach a full actuarial rate.

Homeowners and buyers also get relief from rate increases brought on by remapping. Under the new law, houses that complied with the requirements of their zone when they were built can keep their original zone designation, even if the zone has changed, and even when they are sold.
The new law did not cushion the blow for vacation homes, rental properties, commercial properties or severe repetitive loss properties. As under Biggert-Waters, these buildings will see 25-percent annual increases under the law until they reach their full, unsubsidized rate.
Properties with lapsed policies are not eligible for a subsidized rate under the new law, but to help lower premiums, the act raises the limit on residential deductibles from $5,000 to $10,000.

According to Ifkovic, Biggert-Waters and the new law share the same goal of bringing people up to their full-risk rate, which, she said, “could be not much more than you’re paying now, or could be thousands and thousands more,” depending on various factors relating to your property, including “the design, is there a basement [and] how deep are you in the flood plain.” The new law, said Ifkovic, “provides a longer time frame, but it still gets to the same place.”

The Homeowner Flood Insurance Affordability Act changes have already had a positive impact on the real estate market in the beach area. Bob Stone, the Fairfield real estate agent who witnessed buyers’ skittishness about houses near the water, said: “Now, it’s calmed down.”

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