State lawmakers propose solution to flood insurance crisis

BY STEPHEN NOHLGREN AND JEFF HARRINGTON

TAMPA BAY TIMES

 

Florida Senate bill filed Tuesday seeks to alleviate skyrocketing federal flood insurance premiums by setting up a competing — and hopefully cheaper — state-run market.

The bill, sponsored by Sen. Jeff Brandes, R-St. Petersburg, would invite private insurers to enter the market by creating a new regulatory system just for flood insurance. It would evaluate rates, risks and a company’s financial strength.

Over the last 35 years, Florida homeowners paid four times more in National Flood Insurance Program premiums than they collected in claims. Despite that, many of the older homes in low-lying areas now face sharply higher rates under new Congressional mandates. In some cases, rates are jumping from a few thousand dollars to $15,000 or more.

“I have to believe the private market could make a profit at those prices,’’ Brandes said Tuesday at a news conference.

He and other state legislators jumped into the fray because the Florida Congressional delegation has not been able to secure a rate hike delay in Washington.

State Rep. Larry Ahern, R-Seminole, plans to file a companion bill in the House, and other legislators around the state have signaled their support, Brandes said.

“We hope to have this bill to the governor’s desk early in the session,’’ he said. “It is designed to go into effect immediately,’’ he said, unlike most new laws, which take effect in July.

Many mortgages written in Florida require homeowners to carry flood insurance, almost all provided by the national program. A Congressional overhaul last year zeroed in on hiking rates for older properties that have enjoyed lower rates for decades.

In some cases, rates in flood zone areas will rise about 20 percent annually until they reflect what the federal government deems the proper market risk.

But under certain conditions — such as when a home is sold — the new owner must pay the full market rate immediately, possibly tripling or quadrupling the premium.

“It has killed the real estate market,’’ said Treasure Island Realtor Shirley Madden, who attended the news conference.

One Tampa-based insurer, Homeowners Choice Property & Casualty Insurance, has already jumped into the market by taking care of existing customers.

Beginning Jan. 1, Homeowners Choice will start adding flood endorsements to its homeowners policies. The company has about 140,000 policyholders statewide, but is starting out slowly with this new line of business.

“We’ll probably do the first 3,000 flood policies and see how it goes. Then do the next 3,000,” CEO Paresh Patel said. “It’s a very measured approach. We’re not going to write everybody.”

Patel said 3,000 policies represents about $1 billion in exposure. “Once we get comfortable about the first billion, we can talk about the next billion,” he said.

He estimated the maximum rate of coverage for a property with $250,000 in building coverage and $100,000 in content coverage would be just over $3,000 in an “A” flood zone and about $6,800 in a “V” flood zone.

Homeowners Choice won special approval for its product, said Ron Lehmann, spokesman for the R Street Institute, a think tank that monitors the insurance industry.

The Brandes bill would set up a complete regulatory framework for all flood carriers. Among other things, it would add an engineer who specializes in flood plains to a state board that oversees rate setting, as well as a meteorologist with expertise in floods.

Private insurers could not compete with the federal program when it was subsidized, Lehmann said.

“But if the government is offering real actuarial rates,’’ he said, “that is something our companies can match.’’

The Florida legislation also would add flexibility to the marketplace, Lehmann said. Insurers would not have to offer content coverage, for example, or temporary living expenses if a home was destroyed. Coverage could be pegged to the mortgage amount, not the total replacement cost.

That would be welcome relief for Verla and Richard Waldo, a Seminole couple facing much higher flood rates next fall.

The Waldos, who moved into their 864-square-foot, two-bedroom home in 1997, have whittled their mortgage balance from $75,000 to nearly $40,000.

Verla Waldo, 73, said she had a letter from her bank saying it would be satisfied with $41,600 in flood coverage — enough to cover the remaining mortgage — but her insurance agent insisted that the national program now requires full replacement value, or $111,000 in coverage.

“They’re saying that I can’t say how much coverage I want,” she said. “I’d like to know when my rights were taken away from me.”

Homeowners’ Claims: Water Back-Up, Overflow, or Discharge?

BY CHRISTINE G. BARLOW, CPCU

December 12, 2013 •

 

Water back-up is one of the more confusing coverages in homeowners’ policy. It involves more than back-up, as overflow is mentioned in some of the coverages. But what is a back-up, and how is it different from an overflow or a discharge? All these things come in to play when there is a water loss, and what causes the back-up or overflow may make a difference in whether or not there is coverage.

First let’s look at definitions. A back-up is an accumulation caused by a stoppage in the flow; something prevents the water from continuing down its path, so it is forced to reverse direction and go back the other way. A collapsed drain pipe can cause a back-up; water can no longer proceed down its normal course and is forced to change direction. A blockage can cause a back-up; the blockage prevents the water from going forward, and the water has to reverse itself.

An overflow is when the water exceeds its boundaries; the space is filled to capacity and water then spreads beyond its limits. A tub left running creates an overflow. The tub can no longer hold the water running into it, so the water overflows onto the floor and surrounding area.

A discharge is a flowing or issuing out; water coming from a pipe. A leaking pipe discharges water from the hole in the pipe; it is not a back-up or an overflow, it is simply water issuing from a pipe at the wrong spot.

Discharge or Overflow?

The ISO HO 00 03 provides coverage for water damage that is the result of a discharge or overflow of a plumbing, heating, air conditioning, or household appliance if it is on the residence premises. This covers pipes that leak behind walls, floors, or ceilings; washing machines and dishwashers that overflow, toilets that overflow, or storm drains off premises that overflow due to high rains or floods. It is important to note that a sump, sump pump or related equipment, or a roof drain, gutter or downspout or similar equipment is not considered a plumbing system or household appliance. A discharge or overflow caused by a storm drain, water, steam, or sewer pipe  is covered as well if it is off the premises.

The coverage is for repair of the damaged property—the walls, floors, tiling, and carpet, areas that got saturated and need to be repaired or replaced. Even the tear out of a wall, for example, to get to a leaking pipe is covered. What is not covered is the leaking pipe itself; a pipe leak is often caused by simple wear and tear or age of the system, and that is a maintenance item. However, even if the insured is hanging a picture and pokes a hole in a brand new home and new pipes, the damage to the pipe is not covered. The exclusion for damage to the item causing the loss is all encompassing, and has no exceptions.

The policy specifically excludes water that overflows from sumps, sump pumps, or related equipment or water that backs-up through sewers or drains. However this is where a lot of losses occur; sump pumps may fail or be unable to handle the flow of water during a severe storm or flood, and sewers or drains may back-up due to a stoppage in the flow. Overflows are excluded for sumps because that is a common cause of loss; the sump cannot handle the volume of water it receives. For example, if the drain backs up and overflows because of heavy rainstorms, that is not covered under the policy.

To provide coverage for this occurrence there is the Water Back-up and Sump Discharge or Overflow endorsement, HO 04 95. This provides $5,000 of coverage for back up through a sewer or drain or overflow or discharge of a sump, sump pump or related equipment, even if the equipment suffers a mechanical breakdown. For example, the sump pump motor burns out and the basement floods; there is $5,000 of coverage for that damage. The coverage is for water or waterborne material, so coverage is provided for damage caused by items floating in the water. This coverage does not, however, increase the limits of liability for coverages A, B, C, or D in the homeowners’ policy. This takes the problem of defining back-up or overflow out of the equation of certain losses, since the endorsement provides the coverage that is excluded in the main policy itself.

Water, whether it be from pipes, sewers, sumps, or floods, is one of the bigger issues in homeowners policies. There is a lot of confusion surrounding what is and is not covered. Once you consider the definition of the terms, you are on your way to understanding the coverage. As always, policy language rules the day.