How Will the New Flood Insurance Law Affect Your Policy?

Late last week, President Obama signed H.R.3370, the Menendez-Grimm Flood Reform Act (Menendez-Grimm) in to law. Menendez-Grimm repeals many of the reforms found in the Biggert-Waters Flood Reform Act, which was passed in 2012.  

Old Man River: Grandfathered rates return. Perhaps Menendez-Grimm’s most important reform is the restoration of grandfathered rates for more than 800,000 pre-FIRM properties. Pre-Flood Insurance Rate Map properties are those built before the community's first flood map was issued or prior to Jan. 1, 1975. Under Menendez-Grimm pre-FIRM properties that have been remapped into a higher-risk flood zone will be able retain the same lower rates they paid prior to remapping and the passage of Biggert-Waters and will experience less extreme yearly rate increases. It is important to note that while the yearly rate increases found in Menendez-Grimm are less severe than those found in Biggert-Waters the intention of both acts is the same, the eventual realization of actuarially sound rates on National Flood Insurance Program policies.

 

Under Biggert-Waters pre-FIRM properties were subject to yearly rate increases of up to 25 percent. With the passage of Menendez-Grimm, pre-FIRM properties will have their grandfathered rates restored for one policy year. At the end of the policy year, these properties will see standard yearly rate increases capped at 15 percent for a class of properties and 18 percent on any individual policy with the proviso that FEMA will try to minimize the number of insurance policies that annually cost more than 1 percent of the value of the property being insured. These increases will continue at the 15/18 level until the rates are deemed to be actuarially sound. It is estimated that between 800,000 and 1.1 million policies will be subject to the Menendez-Grimm rate increases. In addition, Menendez-Grimm requires that policyholders on grandfathered properties already hit by increased premiums, will receive refunds for overpaid premiums. These refunds will be paid by FEMA, not by the Write-Your-Own companies that assist in the administration of the policies. Menendez-Grimm does not exclude those with a second home in a flood zone and those with properties that that repeatedly experienced flood losses from the grandfathering provisions. Owners of these types of properties, approximately 250,000 policies, will continue to have their premiums increase by 25 percent until they reach actuarially sound rates.

 

Location, location, location: Homebuyers retain seller rates. The 15/18 cap on rates might be the most notable reform of Menendez-Grimm, but it certainly is not the only rate reform found in the act. Menendez-Grimm also repeals the provision in Biggert-Waters that required homebuyers to pay the full-risk rate for pre-FIRM properties at the time of purchase. Under Menendez-Grimm homebuyers will receive the same treatment as the home seller meaning that instead of a homebuyer being faced with full-risk rate at the time of purchase they will be subject to the yearly 15/18 rate increases discussed above. Similarly Menendez-Grimm also repeals the provision in Biggert-Waters that required pre-FIRM property owners to pay the full-risk rate if they voluntarily purchase a new policy.

 

The devil is in the details: Miscellaneous provisions found in Menendez-Grimm. Other notable changes found in Menendez-Grimm are: premiums can now be paid in monthly installments; the mandatory requirement that policyholders buy coverage for detached buildings such as sheds and garages has been eliminated; and FEMA now will have 18 months rather than two years to complete the long-awaited affordability study.

 

To help pay for the changes, Menendez-Grimm will institute a surcharge on every flood policy. The surcharge will be $25 on residential properties, and $250 on businesses and second homes. Revenue from the assessments will be placed in the NFIP reserve fund.

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