The National Flood Insurance Program (NFIP) provides up to $250,000 on the dwelling and $100,000 on the contents of flood insurance coverage where required for a federally backed mortgage in 22,000 communities nationwide. It also provides an alternative to taxpayer-funded disaster assistance, which averages $5,500 per household but more often means an SBA loan that must repaid with any underlying mortgage. While there is a growing market for private flood insurance, for many, the NFIP continues to be the primary source of asset protection against flooding, the most common and costly natural disaster in the United States.
Unlike the homeowners’ policy, deductibles on flood losses are applied separately. If the dwelling and contents are damaged, the homeowner pays two separate deductibles. In the homeowners’ policy, one deductible applies to the entire loss.
However, as currently structured, the NFIP is not financially sustainable over the long run. According to the Congressional Budget Office, the program is not charging enough in premiums to cover expected claims in catastrophic loss years, and has already borrowed over $30 billion from taxpayers to make up the difference. For these reasons, NAR supports a strengthened NFIP coupled with a robust private market to offer choices and maintain access to flood insurance in all markets at all times. NAR believes:
- NFIP reauthorization should be long term.
- Flood mapping should be done at higher resolutions with a streamlined and less expensive appeal process.
- Premiums should be more accurately priced to the property specific risk, but any rate increases should be gradual and phased in over many years.
- Private flood insurance options should be encouraged where cost effective, provided that NFIP remains a viable option for property owners.
- To keep rates affordable, the federal government should also provide pre-disaster risk mitigation options – including guaranteed loans, grants and buyouts for property owners to build stronger or relocate to higher ground.
- There should be better oversight and training of insurance companies marketing NFIP policies, and an adequately supported FEMA Office of the Flood Insurance Advocate to assist policyholders with flood map and rate disputes.
Flooding is the most common and costly natural disaster in the U.S., and it can impact your business as a real estate professional. Flooding is considered a material fact to a real estate transaction, and failure to disclosure flood damage can result in liability.
Brokers and agents generally owe buyers a duty to disclose adverse material features, conditions, or aspects of property of which they have actual knowledge. Brokers and agents are not, however, generally required to investigate independently whether a property is in a flood zone or otherwise in an area likely to be subject to flooding or flood risks.
In general, a broker or agent must disclose the following facts when they have actual knowledge:
- that a property is in an area where flood insurance is required;
- that flood insurance was required in past;
- that the property is located in an area that has flooded in the past;
- and that the property is located in an area subject to flood risk that may cause many or most owners to purchase flood insurance.
State laws on flood disclosures vary, so it’s crucial to understand your obligations in the state where you practice real estate. A good place to start is this state-by-state flood disclosure survey published at https://www.nar.realtor/national-flood-insurance-program/state-flood-hazard-disclosures-survey.
And remember, a property does not have to be near water to flood. Heavy rain, rising sea and river levels, melting snow, drainage system backups, and broken water mains can all cause flooding. In fact, 25 percent of flood insurance claims occur in low or moderate risk areas. Flood damage is excluded under standard home owner insurance policies, but you don’t have to be in a high risk flood zone to obtain flood insurance.
Potential Increases in Premium
The Biggert-Waters Flood Insurance Reform Act of 2012 (B-W Act) reauthorized the National Flood Insurance Program for an additional 5 years. That Act also largely eliminated federal subsidies of flood insurance, resulting in increases in the premiums to be charged for flood insurance coverage, as determined by FEMA. Because those rate increases were in some cases significant, many property owners or prospective property owners raised concerns about their exposure to higher flood insurance rates. Real estate brokers and agents also raised concerns about their possible exposure to misrepresentation claims by property purchasers who acquired property before such increases take effect and are later subject to substantial increases in their flood insurance premiums.
As a result of the concerns of property owners about higher flood insurance premiums, NAR and others sought from Congress legislation to slow the implementation of higher rates. On March 21, 2014 the President signed the Homeowner Flood Insurance Affordability Act of 2014. That Act changes the B-W Act to significantly mitigate the current impact of higher flood insurance rates. This includes eliminating the immediate application of full market-based rates upon the sale of a property or a new policy, limiting annual flood insurance premium rate increases to 18% for primary homes and 18-25% for second homes, directing FEMA to implement new rate tables based on the new Act within 8-16 months, allowing policy holders to receive a refund of premiums already paid in excess of the amount that would be allowed under the new law, allowing new owners to assume a prior owner’s policy at existing rates, providing for properties to be “grandfathered” to retain their flood zone’s rates even when remapped into different flood zones, and phasing in rate increases for newly mapped properties.
The following guidance is offered for brokers and agents in marketing and selling property for which flood insurance may be required, or that is located in areas where the purchase of flood insurance may be prudent.
Brokers and agents may ask buyers to sign an acknowledgement of receipt of any such materials provided.
- Such advice should further indicate that notwithstanding the 2014 Homeowner Flood Insurance Affordability Act, prior flood insurance premiums will not be representative of future rates and that rates will increase, although more slowly than anticipated under the B-W Act. See below for an example of a disclosure statement that could be used for this purpose, although brokers and agents may also use different methods or language to communicate to buyers information about flood insurance and flood insurance premiums. In circumstances where flood insurance is not required and there is no reasonable basis for a broker or agent to believe that it may be required or is prudent to have, no such disclosure need be provided.
If a broker or agent determines that it is necessary to make disclosures to buyers regarding flood insurance, as described above, he should also advise buyers that, as a result of the B-W Act, flood insurance rates are likely to be higher than in the past. Although the amount of such rate increases may be lower than they would have otherwise been under the B-W Act alone, increases will nevertheless be implemented with the goal of reaching full market based premium amounts in time.
- Provide buyers with information about the importance of flood insurance, details about the NFIP and flood insurance rates. The broker or agent should be prepared to provide sources of information about these subjects available from competent and reliable third-party sources. “. These might include websites, publications, pamphlets, or similar materials prepared or distributed by FEMA or other federal or state agencies or departments, or other sources known to be credible. Examples of such publications can be found at the following links:
- Where flood insurance may be required or may be advisable, brokers and agents may also find it helpful to identify to purchasers one or more suppliers of flood insurance coverage to be provided to interested purchasers seeking such information about flood insurance coverage and rates. Brokers and agents should not recommend or endorse any particular carrier, and it is prudent to identify more than one carrier and encourage interested buyers to compare flood insurance coverage among several different carriers.
- Under the Homeowner Flood Insurance Affordability Act some sellers are entitled to a refund of flood insurance premiums that they previously paid that were higher than now provided for under the Act but may not be able to collect that refund prior to closing of a sale of the property. Listing brokers representing sellers in that position should suggest that the seller discuss with his or her attorney the best way to preserve their right to collect that refund after the transaction closes.
Sample Flood Insurance Disclosure Statement
Your mortgage lender [may] [will] require you to purchase flood insurance in connection with your purchase of this property. The National Flood Insurance Program provides for the availability of flood insurance and establishes flood insurance policy premiums based on the risk of flooding in the area where properties are located. Recent changes to federal law (The Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014, in particular) will result in changes to flood insurance premiums that are likely to be higher, and in the future may be substantially higher, than premiums paid for flood insurance prior to or at the time of sale of the property. As a result, purchasers of property should not rely on the premiums paid for flood insurance on this property previously as an indication of the premiums that will apply after completion of the purchase. In considering purchase of this property you should consult with one or more carriers of flood insurance for a better understanding of flood insurance coverage, current and anticipated future flood insurance premiums, whether the prior owner’s policy may be assumed by a subsequent purchaser of the property, and other matters related to the purchase of flood insurance for the property. You may also wish to contact the Federal Emergency Management Agency (FEMA) for more information about flood insurance as it relates to this property.
H.R. 3167, the National Flood Insurance Program Reauthorization Act of 2019
Austin Perez, email@example.com
Austin Perez, firstname.lastname@example.org
What is the fundamental issue?
Congress must reauthorize the National Flood Insurance Program (NFIP) to provide flood insurance after September 30, 2020 and include meaningful reforms to strength the program’s sustainability.
I am a real estate professional. What does this mean for my business?
Flood insurance is required for a mortgage in more than 20,000 communities nationwide. While there is a growing private market for flood insurance, millions of small business and home owners currently depend on the NFIP to protect their property against flooding, the most costly and common natural disaster in the United States. Without a federal insurance program, more property owners would be uninsured and have to turn to the Federal government for taxpayer-funded disaster and rebuilding assistance after major floods.
Reauthorizing and strengthening the NFIP so it is sustainable over the long run;
Encouraging the development of a more robust private flood insurance market to offer comparable coverage at lower cost than the NFIP;
Providing federal assistance and resources for property owners to build to higher standards, mitigate the risk of flooding, and keep insurance rates affordable;
More granularly pricing NFIP policies to better reflect the property's specific risk but gradually phasing in increases over time; and
Improving flood map accuracy so fewer property owners have to file expensive appeals.
On July 6, 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act reauthorizing the NFIP for 5 years. While ending the shutdowns and short extensions that cost 40,000 property sales a month, implementation problems threatened to undermine real estate transactions where flood insurance is required for a mortgage.
On March 13, 2014, Congress amended Biggert-Waters with the passage of The Homeowner Flood Insurance Affordability Act. These amendments were signed into law on March 21, 2014:
- Repealed FEMA's authority to raise insurance rates at the time of property sale;
- Restored grandfathering for properties that were built to code but are later remapped;
- Reset and refunded premiums back to pre-Biggert Waters levels and gradually phases-in full risk rates over time;
- Limited future rate increases to 18% annually for newer properties and 25% for the older ones;
- Added a nominal surcharge to NFIP policies until property owners pay full-risk rates; and
- Established the Office of the Flood Insurance Advocate to help property owners with faulty flood maps and insurance rate concerns.
On June 12, 2019, by a unanimous vote of 59 to 0, the House Financial Services Committee approved HR 3167, the NFIP Reauthorization Act, to extend the program for five years, include significant reforms to mapping and mitigation, and provide private flood insurance options. NAR strongly supports the bill, which meets many NAR policy principles and is the product of extensive, bipartisan negotiations between Chairwoman Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC).
Next, the House of Representatives must vote on the measure. NAR is urging the House to take up the NFIP Reauthorization Act at the first opportunity and move the bill to the United States Senate.
NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require a password.
On July 6, 2012, the President signed into law “The Biggert-Waters Flood Insurance Reform Act of 2012” which extends the National Flood Insurance Program (NFIP) for five years and includes many program reforms. NAR has created this NFIP Resources Page, which includes links to detailed information on the NFIP to help answer REALTOR® questions about the changes coming to the NFIP.
- NAR Background: National Flood Insurance Program (NFIP)
- NAR Issue Brief: How Home Buying May Vary in the Floodplain
- Flood Insurance Rate Webinar: Independent actuaries with the Milliman firm provide an educational presentation on how the National Flood Insurance Program sets its insurance rates.
- Milliman Flood Insurance Study
- NAR Issue Brief: Flood Insurance Premium Rates - At a Glance
- NAR Statement: Homeowner Flood Insurance Affordability Act
- Comparison Chart: Original Biggert Waters Law and the Flood Insurance Affordability Act Changes
- FAQs: Homeowner Flood Insurance Affordability Act
- Section by Section Summary: National Flood Insurance Affordability Act
- Chart: Flood Insurance Premium Rates for Second Homes
- NAR Legal Guidance
- FEMA: Information re: the Office of the Flood Insurance Advocate to assist property owners
- FEMA: National Flood Insurance Program Call Center for Policyholders and Disaster Survivors Nationwide
- FEMA: Flood Insurance for Businesses: Impacts of Recent Legislation
- FEMA's Bulletin Enabling Buyers to Assume Seller's Rates
- FEMA Resource on Flood Insurance Reforms
- FEMA: Overview of NFIP
- FEMA Grandfathering Rules
- FEMA Presentation on Changes to NFIP under Affordability Amendments
- FEMA: Notices to Congress: Monthly Updates on Flood Mapping
- FEMA: Official Source for Flood Mapping and Hazard Layer
FEMA’S Rate Relief Programs
In anticipation of increasing flood insurance rates, FEMA identifies several options that may directly or indirectly result in flood insurance discounts to policyholders.
- NFIP Community Rating System
The NFIP Community Rating System (CRS) offers insurance premium discounts (up to 45 percent) for individuals in communities implementing floodplain management practices that exceed the minimum requirements of the NFIP. By implementing CRS floodplain management best practices, flood losses are reduced, public safety is enhanced, and the cost of flood insurance is decreased.
- FEMA’s Hazard Mitigation Assistance (HMA) Program
FEMA's Hazard Mitigation Assistance (HMA) grant programs provide funding for eligible mitigation activities, including elevating properties, that reduce disaster losses and protect life and property from future disaster damages.
- Elevation Certificates
An Elevation Certificate is an important tool that documents your building’s elevation. The below fact sheet provides valuable information for homeowners including guidance for obtaining an Elevation Certificate which is necessary for determining full-risk rates in high-risk zones. It may also show that you may be paying too much for flood insurance.
- FEMA Flood Map Appeal
If a person believes their property was incorrectly included in a NFIP-identified Special Flood Hazard Area (SFHA), they may submit an application to FEMA for a formal determination of the property's location and/or elevation relative to the SFHA.
- Raise the Deductible
And like any other insurance policy, you can always raise the deductible.
- NAR: Flood Insurance & Disclosures: What You Need to Know Now
- FEMA: History and Upcoming Changes to the NFIP
- NAR: What is the Impact of New Flood Bill?
- NAR: Flood Bill Helps Commercial
- NAR: FEMA Flood Law Processing
- Greg Larson, Bismarck Mandan Board of REALTORS®: The Importance of the National Flood Insurance Program
- FEMA: Flood Insurance Policy and Claim Statistics
- Interactive Map for NFIP Subsidized Policies by State and County
- Determine Your Flood Zone: “V” (high risk coastal), “A” (high risk river), “X” (low risk) or “D” (unmapped)
- FEMA: NFIP Actuarial Rate Review
Resources for REALTORS® and Consumers
- NAR/U.S. Fish & Wildlife Service page: Coastal Barrier Resources System
- NAR Legal Guidance on Disclosures
- FEMA: Flood Insurance Rate Maps
- NAR/FEMA Brochure: What To Ask Your Insurance Agent
- NAR/FEMA Brochure: What to Know and Say About Flood Risk and Flood Insurance
- HouseLogic: What Consumers Need to Know About Flood Insurance
- FEMA: Homeowner’s Guide to Elevation Certificates
- Propertycasualty360.com -The 4 Things Homeowners Misunderstand About Flood Insurance
Additional Information & Research
- Insurance Information Institute: Flood Insurance
- Insurance Information Institute Flood Facts
- University of PA – The Wharton School: NFIP Issue Briefs
- RAND Gulf States Policy Institute Analysis of the NFIP and Proposed Reforms
- Milliman National Flood Insurance Program Study (2015)
- Deloitte Center for Financial Services: The potential for flood insurance privatization in the U.S. (2014)
- GAO Collected Research on NFIP (2013)
- GAO Report - Flood Insurance: More Information Needed on Subsidized Properties (2013)
- CRS Report: Status and Remaining Issues for Congress (2013)
- University of PA – The Wharton School: White Paper on Pricing Flood Insurance – Texas (2012)
- University of PA – The Wharton School: Paper on Modifying NFIP to Reduce Flood Losses (2012)
- CRS Report: NFIP Background, Challenges, and Financial Status (2011)
- CBO Study of NFIP Premium Rates (2009)
- American Institutes for Research: Evaluation of the NFIP’s Building Standards (2006)
- FEMA sub-study: The Role of Actuarial Soundness in the National Flood Insurance Program (2006)
- FEMA report: Chronology of Major Events Affecting the NFIP (2005)
- PriceWatehouseCooper’s Economic Impact Study of Charging Full Actuarial Rates (1999)
- CBO’s review of the PriceWaterhouse Cooper Actuarial Rate Study (1999)
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The inclusion of links on this page does not imply endorsement by the National Association of REALTORS®. NAR makes no representations about whether the content of any external sites which may be linked in this page complies with state or federal laws or regulations or with applicable NAR policies. These links are provided for your convenience only and you rely on them at your own risk.