Wednesday, January 12, 2011

Substantial Improvement Definition and the NFIP

A reform momentum is likely to see changes to the NFIP during the 112th Congress. Perhaps some administrative report also.

All readers of this blog should know that I consider this program to be a land use program, not an insurance program. As part of the reform effort the NFIP administrators asked for suggestions. I submitted a total of 25 and the item below was one of the suggestions.

So for the larger record here goes:

Substantial Damage & Substantial Improvement

Extract from Title 44 CFR Part 59

'Substantial damage' means damage of
any origin sustained by a structure
whereby the cost of restoring the
structure to its before damaged condition
would equal or exceed 50 percent
of the market value of the structure
before the damage occurred.

'Substantial improvement' means any reconstruction,
rehabilitation, addition,
or other improvement of a structure,
the cost of which equals or exceeds 50
percent of the market value of the
structure before the ‘‘start of construction’’
of the improvement. This term
includes structures which have incurred
‘‘substantial damage’’, regardless
of the actual repair work performed.
The term does not, however,
include either:
(1) Any project for improvement of a
structure to correct existing violations
of state or local health, sanitary, or
safety code specifications which have
been identified by the local code enforcement
official and which are the
minimum necessary to assure safe living
conditions or
(2) Any alteration of a ‘‘historic
structure’’, provided that the alteration
will not preclude the structure’s
continued designation as a ‘‘historic

These two definitions together with start of construction represent one of the most basic political compromises in the regulations of the National Flood Insurance Program. Start of Construction represents another and will be separately addressed in a blog post.

How do I know? I was there! Four people during the time the NFIP was located in the Department of Housing and Urban Development’s Federal Insurance Administration during its first major regulatory adoption in 1975 and 1976 were involved. James Ross McKay, J.D, a program official, now deceased. Larry Rubenstein, later a J.D. Dr. Jon Kusler, PhD (contractor) and myself representing HUD OGC. I was asked to brief on a closed meeting basis J. Robert Hunter and one or two other staffers after preparing the final rule that was issued in March 1976. Bob Hunter, then Acting Federal Insurance Administrator after the departure of George K. Bernstein, asked me to brief him on the implications of the rule and problematic areas. The definition of SUBSTANTIAL IMPROVEMENT was immediately identified by me as being the most problematic portion of the entire final regulation. Why? I asked each of the attendees to tell me what they thought it meant and to explain it to me. Bob Hunter had one version and the other attendees other versions. Bob asked me “which is the correct interpretation?” priding himself on his parsing skills and background as a Certified Insurance Actuary. I answered all of them. That is the problem. It is both patently and latently ambiguous on its current language. I told him that I thought the language should remain ambiguous but should be tightened up later. It was further modified in the early 80’s but still is subject to different interpretations. The result stands as above. It is intentionally ambiguous and perhaps unenforceable except that each of the 20,000 governmental units participating in the NFIP probably understands its purpose and has administered it in a certain way.

I believe that a fundamental reform of the NFIP would be to rework these definitions and make them as clear as possible since these definitions are crucial to ending grandfathering of improved real estate in the NFIP.

All the readers of this blog know that I believe it is still a very short period of record, 40 odd years, for the NFIP and much has been learned but much needs to be learned. I expect statutory revisions to the NFIP in the 112th Congress and this issue is worthy of oversight.

Good luck to the revisers and yes blame me for allowing a regulatory ambiguity to exist all these years.