What happens to your flood insurance premiums after you make a claim?

What happens to your flood insurance premiums after you make a claim?

You might think that flood insurance premiums are like auto insurance premiums and that a claim you make for flood damage would greatly increase your cost of insurance, starting with your next payment.

Not so! Flood insurance premiums, like every aspect of flood insurance, are completely mandated and controlled by FEMA, the Federal agency tasked with the problem of insuring homes in flood zones.

FEMA decides what land is in or out of a flood zone. FEMA establishes the premium for each piece of property in flood zones, and FEMA doesn't necessarily, or even usually, re-rate properties based on the claims made. That may be because the flood zones are established based on the actuarial risk of having a 1% chance of flood during any given year.  That 1% chance is what people are talking about when they say "a hundred-year flood". It's really the risk that their will be a flood THIS year.

So if you are paying $1,000 a year for flood insurance and make a claim for $150,000, how much will your premium be next year?  $1,000.

That fact doesn't change the hot button issue right now, which is that premiums are rising to match the true actuarial risk of flood. Sometimes this means that people who have been paying a few hundred or a few thousand dollars a year are now staring at bills with five digits and wondering how they can afford to keep their house.

Here in Massachusetts, there are some waterfront homes worth seven figures where doubling or tripling the flood insurance premium isn't going to sink, or soak, the owner in unaffordable premiums. Not every waterfront home here has a value like that, though.

If a house on a Louisiana bayou worth $150,000 suddenly has an annual flood insurance premium of $20,000 . . . well, that home owner might just walk away from the house. Never mind that a flood might someday damage or obliterate the house -- the insurance premium could render the home valueless today. That's a national problem, not just a local problem for waterfront owners.

We NEED a federal insurance program. The private market won't create insurance suitable for this risk. It's not just about oceanfront property, either. Many people across the country live in low-lying areas that are subject to flooding. Think Mississippi River.

What FEMA and Congress are now trying to figure out is whether the actuarial data that's been produced for the latest FEMA flood maps is right: whether it captures the true risk of flood or not. Then there is a battle about how much the premiums should be to cover that risk. Then there's the argument about whether flood insurance should cover only the lenders' and banks' risk of losing money on their mortgages, or whether homeowners should be forced to pay for more coverage to include their equity, their contents, their home interiors and their second floors.  (Flood insurance only pays for damage to the first floor.)

How this program will work in the coming years, and what it will cost, are the subject of enormous debate right now. Stay tuned for more news and information. Same Bat-Channel, Same Bat-Blog.

P.S. Yeah, that's my friend Carolyn waiting on a "happy" wave, not a flood disaster wave. Good times.