The Boston Globe ran an article on December 17th regarding hearings on the state flood insurance relief legislation passed last year, As flood insurance costs fall, residents’ risks rise. The article is informative, to a point. It addresses a disagreement on the scope of the legislation passed last year to limit the ability of banks to require flood insurance coverage that is greater than the amount of a mortgage. The article also focuses in on one of the most difficult issues for a homeowner to wrap themselves around, how much coverage does the homeowner need?
The legislation is designed to try to limit the, immediate, out of pocket costs to a homeowner for flood insurance by establishing that banks cannot require more flood insurance than is required to fully pay off outstanding mortgages on a property. This is where things get sticky.
From one perspective, it saves the homeowner money (now) by lowering the total amount insured, and therefor the annual premium payments. From a different perspective it simply ensures that the banks will be reimbursed for outstanding loans on a property in the event of a flood.
It all boils down to risk, who is taking it, and how much of a risk the homeowner wants to take. In Dennis there where 937 flood insurance policies written in 2014, 733 of these were non-subsidized policies. Given this mortgage question was not in play, these 733 policies paid premiums that were necessary, essentially, to cover the full risk of damage. There were 383 policies (34% of all policies) that were “subsidized” or paying insurance rates lower than what might be necessary to properly pay for the full risk of damage (these policies were, however, written to cover full risk). If mortgage cost, versus replacement cost, gets put into the equation, any number of these 937 policyholders could see lower rates. This is where the question of risk kicks in.
Since the advent of the federal flood insurance program, covering Dennis, in 1978 (post Blizzard of ’78) the average payout has been about $10,000 per claim. However, in that time period, we have not had a storm the magnitude of the 1% storm, the last of these occurring in 1954. In the 35 years of the federal flood insurance program we have had total payouts of about $1.5 million. The Hurricane of 1944 reportedly destroyed 230 homes and damaged nearly 4,000 others in Dennis alone, about 50% of our housing stock in 1944. Demolition and reconstruction costs for a destroyed home could cost well over the $250,000 maximum coverage limit provided by FEMA, and well above most outstanding mortgages.
So, what to do? For most, true risk may lie somewhere between the $250,000 insurance cap established by FEMA and the lesser mortgage value carried by the homeowner. Homeowners would best be advised to seek the advice of engineering professionals as to the true risk of storm damage to a home, and the cost of repairing that damage, when considering acquiring flood insurance. No one would consider on their regular homeowners insurance acquiring less than replacement value in the event of a fire, I would similarly suggest that getting anything less than what it will cost to repair a structure damaged by a storm the strength of Hurricane Sandy hitting us in the manner it hit the Rhode Island/Eastern Connecticut shoreline would be a mistake.
I would also strongly suggest that any savings one might attain between the insured amount, and the amount your mortgage holder is suggesting you need, be used to make storm and flood-proofing modifications to your home. In the long run, these improvements are the ones that will truly save you headaches and money.