NMHC: Flood Waters Rise

Will Insurance Be Renewed in Time to Provide Peak Storm Season Protection?

Hurricane Harvey, the Category 4 storm that pummeled the Texas Gulf Coast with destructive winds and historic rainfall in late August, is a fierce reminder that hurricane season is in full swing. As with Superstorm Sandy and Hurricane Katrina, much of Harvey’s damage tally will trace to the flooding that followed.

This latest storm—along with last year’s record 19 floods that inundated areas as diverse as Louisiana, Maryland, Texas and West Virginia—underscores the importance of flood insurance for properties, including multifamily, and the need for Congress to reauthorize the National Flood Insurance Program before it expires at the end of September.

For most apartment communities, the NFIP is the only available option for flood damage protection. While those in high-risk areas are most vulnerable, the threat of flood damage extends far beyond designated flood zones. The Federal Emergency Management Agency estimates that more than 20 percent of flood insurance claims come from properties outside of mapped high-risk flood areas, as we saw with the major flooding in Louisiana last year.

Without access to affordable, quality flood insurance through the NFIP, multifamily owners and operators can neither protect their property investments nor manage the increasing costs of providing housing.

A program primer

Federal law requires apartment properties with federally regulated and insured mortgages in high-risk flood areas to purchase flood insurance. The private insurance market, however, has been hesitant to widely expand coverage beyond high-value and lower-risk multifamily properties, offering few policy options for apartment owners and operators in those areas. And those options are, in most cases, cost prohibitive, making the federal program a single line of defense.

At the same time, many lenders and private insurance carriers require multifamily firms to use the federal flood insurance program as a base layer of coverage for their properties. The idea is that the federal insurance would cover damage and losses up to a point, after which their private umbrella coverage would kick in.

While the program is critical to multifamily operations in the absence of a robust private flood insurance market, it is not without its challenges. The program was financially self-supporting, with insurance premiums covering operating expenses and insurance claims, until 2004.

A number of major disasters and hurricanes since then, including Hurricane Katrina and Superstorm Sandy, have caused the NFIP to assume more than $24 billion in debt. While substantial positive reforms have been made to the program to shore up its finances, its bleak fiscal outlook remains problematic and opens it up to criticism and potential negative modifications that could be harmful to its future.

State of play

First created in 1968, the NFIP was last reauthorized by Congress in 2012. The multifamily industry benefited greatly that year, when higher NFIP coverage limits were made available to multifamily properties. The maximum NFIP policy coverage limit available for most traditional multifamily properties increased from $250,000 to $500,000 per building. This increase has been very positive for multifamily borrowers because it makes complying with lender flood insurance requirements easier when securing project financing.

However, the authorization had a five-year lifespan, so many of the issues with the program’s fiscal health are being revisited anew. NMHC and its legislative partner, the National Apartment Industry, have been working with political leaders on this issue to be sure many of the industry’s priorities are included in the reauthorization.

In the House, the legislative package under consideration at press time was a five-year program reauthorization and includes improvements in the flood mapping and appeals process and provides for a substantial investment in pre-disaster mitigation.

Other provisions include language that ensures coverage for small multifamily properties, the removal of cumbersome federal purchase requirements from commercially financed properties, a doubling of the Increased Cost of Compliance mitigation funding to $60,000 per property and premium reductions for multifamily and commercial property owners who invest in alternative methods of flood mitigation.

Senate Banking Committee Chairman Mike Crapo (R-Idaho) and Ranking Member Sherrod Brown (D-Ohio) introduced bipartisan legislation to reauthorize and reform the NFIP. The package calls for a six-year reauthorization of the program and also includes improvements in the mapping process and provides for a continued investment in pre-disaster mitigation. Beyond similar calls for boosting ICC mitigation funding and premium reductions for alternative mitigation efforts, the proposal would order a feasibility study regarding business interruption coverage, something for which NMHC and NAA have advocated.

Agreement coming soon?

Kevin Donnelly, vice president of government affairs for the National Multifamily Housing Council in Washington, D.C.

The similarities between the two proposals working their way through their respective chambers of Congress suggest agreement on a reauthorization package could be reached before the program’s expiration, although some sticking points remain. Should these differences prove too difficult to bridge, when Congress returns from its summer recess, lawmakers have the option to pass a short-term extension that effectively keeps the program from lapsing while a more permanent solution is negotiated.

As the clock ticks down on the current program, NMHC continues to work with members of Congress to advance a reauthorization package that will both provide a quality federal program and encourage further private market insurance development so multifamily firms can adequately protect their property investments. 

Editor’s Note: On September 8, 2017, President Trump signed legislation that provides for an initial $15 billion in disaster aid for victims of Hurricane Harvey, while at the same time providing for a short term extension of the National Flood Insurance Program for three months. Congress will need to revisit the issue quickly as it will again lapse in early December.

Kevin Donnelly is vice president of government affairs for the National Multifamily Housing Council in Washington, D.C. He can be reached at [email protected].  

Originally appearing in the September 2017 issue of MHN.