Friday, October 29, 2010

National Flood Insurance Program

Some of the readers of this blog or my CV know that I was one of the principle lawyers for the National Flood Insurance Program authorized by 42 USC 4001 and following from July 1, 1974 to July 1, 1986. I have not posted previously on this blog on that subject but that restraint is now ending as we face the "reforms" that probably will be considered in the 112th Congress. The premise of the program is that existing mistakes of development in the nation's flood plains will be insured in return for wiser future development of those flood plains. Also the program had as one of its primary purposes the reduction of "free" federal disaster relief.

An argument can be mounted cogently that both aims of the program failed. But remarkably there is really not much that is studied as to what would have happened or might have happened without the program. The leading challenges to the program are because post-Katrina the program hovers with $20B in claims payments that had to be largely covered with appropriated funds.

Well this first post will be short but much more later. A first principle of the statutory scheme is that only disclosed hazards on the programs maps will be covered by insurance. This has never occurred and in Katrina, largely unmapped areas subject to localized flooding from non-mainstream rivers of oceans were flooded and costly. So I would renew this principle and make sure that in no event was a property with an unmapped 100 year flood [really the 1% annual occurrence flood] was covered by the federal government. This would encourage local governments to accept the maps and development restrictions and incentivize disclosure not non-disclosure.
Another suggestion is that all mobile and manufactured housing be excluded from coverage. The definitions vary but in fact most of these homes are located on developed lots that often are grandfathered into the future with no zoning or building code enforcement. Also physical damage coverage available from the private insurance sector is better coverage and cheaper than the NFIP.
ALSO, historically losses for installed and uninstalled carpets have amounted to in excess of 15-25% of losses and thus carpets however defined should be excluded from coverage. This is also a subject area of fraud since the NFIP has never required flooded carpet to be documented as to its total loss and as a result much is cleaned and reused while the program pays for new carpet.

A final suggestion is that definition A-2 of the term "flood" should be eliminated from the policy and in addition application and policy language added [as it once was] that any property found in violation of existing flood plain management regulations at the time of the loss would be VOID AB INITIO.

These seemingly minor changes are not minor at all an in fact would reform the program drastically.

Another suggestion would be that flood insurance would be free and handed out to all unmapped occupant owners of houses and they would be notified no more disaster relief ever. Also after each loss they would gradually begin paying premiums to cover expected aggregate losses in the areas flooded. And only the equity portion of the owned property would be federally insured. All mortgagee interests would have to be privately insured.

And finally the insurance aspects of the NFIP should be transferred to the Department of the Treasury and the mapping, mitigation, and land use aspects transferred to NOAA and those later aspects of the program should be under the oversight of the Science Committees of the House and Senate not the Banking Committees which has directed the program largely to benefit lenders who constantly argued the program was a burden on them. And NO MORTGAGE generated from the nation's flood plains should be allowed to be securitized and exempted legally or illegally with actual ownership of the property and recordation in local property records not accomplished. This would give incentives to disclosure bigtime.