Last summer both houses of Congress passed legislation intended to shore up FEMA in the wake of huge deficits that resulted from Hurricane Katrina-related losses.
What transpired was this: “Congress agreed the federal government would no longer subsidize flood insurance. In other words, homes in high-risk areas would pay the full freight on their premiums.” So, starting October 1st, “any business in a high-risk area will immediately lose its flood insurance subsidy. Any home sold after October 1st will also lose its subsidy. And…any home sold after Biggert-Waters passed last summer will lose its subsidy [as well]. For everyone else in high-risk areas…[t]heir premiums will increase [at ranges up to 25] percent every year until their policies are no longer subsidized.”
According to the attached Tampa Bay Times article: “The aim behind the [legislation] is laudable. The execution is most certainly not.”
Sound drastic? Read on:
- Anyone with a flood policy on a “pre-firm” home (one that does not meet base flood elevation requirements) whose purchase closed after July 6, 2012, will receive a notice of non-renewal. To continue coverage beyond one year the homeowner will need to supply an elevation certificate, and pay the full risk rate for the policy going forward. If they elect not to procure the elevation certificate, then they are assessed on an alternative rate structure, but only for one year. If they have a loss during that one-year period, the homeowner then has to supply the elevation certificate and pay the applicable premium in order for the insurer to then pay the claim.
- Anyone who bought a “pre-firm” home before July 6, 2012 will be subject to rate increases, which will go into effect October 1st.
- Flood policies are no longer assumable after October 1st.
- The new rules distinguish (discriminate?) between primary and secondary/seasonal residents in establishing rates. To be deemed a “primary resident,” an individual has to live in the home 80% of the year – homestead status, etc. makes no difference – it is a residency test. Otherwise, the property is considered a seasonal/secondary residence, and subject to a different (more aggressive) rate structure.
From a practical perspective, how does a Realtor deal with such issues and avoid getting into the unlicensed practice of insurance? That’s simple: leave it to the insurance professionals. On the listing side, avoid any representations in your listing materials, contracts and presentations regarding availability or cost of flood insurance coverage. On the selling side, make sure your clients retain a professional insurance agent to assess potential properties and advise of exactly what kind of coverage is available, and for how much. Also be sure to include the FAR/BAR addendum on point with your offers so that the insurance issue is a contingency allowing cancellation should the policy premium be too much for the buyer to afford.
Keep in mind that this is a rapidly developing issue, so it is imperative to maintain close contact with your own trusted insurance professionals to make sure you remain abreast of changes, additional rule clarifications, and their potential impact on your clients and their transactions.
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** Publisher’s note: Tampa Bay Times article provided courtesy of Jim Henning, Florida Executive Realty (Tampa). Contact Jim at 813.310.8108, email@example.com. This post was composed with valuable input from Robert Ludwig, formerly of Ludwig-Walpole insurance agency, now Bolt Insurance Agency (Sarasota). This post was published at 30,000 feet (DL650, TPA -> LGA).