Why Does My Mortgage Lender Require Me to Buy Flood Insurance?
Under Federal law, the purchase of flood insurance is mandatory for all federal or federally related financial assistance for the acquisition and/or construction of buildings in high-risk flood areas (referred to as Special Flood Hazard Areas).
The amount of flood insurance coverage required by the Flood Disaster Protection Act of 1973, as amended by the National Flood Insurance Reform Act of 1994, is the lesser of the following:
- The maximum amount of National Flood Insurance Program coverage available for the particular property type,
- The outstanding principal balance of the loan, or
- The insurable value of the structure.
If the property is not in a high-risk area, but instead in a moderate-to-low risk area, Federal law does not require flood insurance; however, a lender can still require it. In fact, over 20 percent of all flood insurance claims come from areas outside of mapped high-risk flood zones. Note that if during the life of the loan the maps are revised and the property is now in the high-risk area, your lender will notify you that you must purchase flood insurance.
How Flood Insurance Became Available
Historically, flood insurance was and still is unavailable solely from the private sector. The catastrophic nature of floods is largely too great a risk for the private insurance industry to profitably provide coverage at an affordable price. The National Flood Insurance Reform Act of 1968 made federal flood insurance available to communities that participate within the National Flood Insurance Program (NFIP).
The National Flood Insurance Program (NFIP)
The NFIP allows participating insurance companies to write and service flood insurance policies in their own name while the Federal Government retains responsibility for underwriting losses. Because these policies are regulated by the NFIP, and the Federal Government has established a modest maximum allowable processing fee the insurance premiums, flood insurance should be comparable regardless of the company used. Different coverage amounts and rating errors; however, can result in substantial insurance premium differences.
To participate within the NFIP, communities are required to implement minimum floodplain development standards and enforce them. These standards help make flood insurance actuarially feasible. The City of Austell has been participating in the NFIP since April 5, 1974. Structures constructed prior to the creation of the floodplain hazard maps, known as pre-firm structures, are currently charged lower premiums as they were built before the flood risk was known.
With the exception of Hurricane Katrina, the NFIP is overall self-supporting by borrowing money from another part of the Federal Government for years with significant losses and repaying with interest in years with less than average claims.
Insurance Resources and Upcoming Changes
Here is more detailed information about flood insurance coverage. The NFIP can be reached directly at 1-800-427-4661. They can also provide assistance locating local insurance agents that offer flood insurance. You may also visit FloodSmart to locate a local insurance agent.
Due to recent NFIP reform legislation it is not possible to fully explain the insurance rate changes particularly for homes built prior to the City of Eugene adopting its first floodplain ordinance in 1985. It is recommended that anyone who owns such properties within the floodplain due their own due diligence. FEMA has dedicated many websites to the implications of this topic.
Citizens Benefit from Lower Flood Insurance Premiums
City of Austell Earns Class 8 Rating
Flood insurance policyholders in the City of Austell have seen reductions in premiums effective October 1, 2012. Staff worked diligently to become a participant in the Community Rating System and has earned a class rating from the National Flood Insurance Program Community Rating System. This program was created to recognize communities where floodplain management standards exceed the minimum federal standards and, in exchange, policyholders receive discounts on their flood insurance premiums. Currently, policyholders that live within the Special Flood Hazard Area currently enjoy an eight percent discount.
For more information, contact your insurance agent today.
Related Links and Documents
Flood Insurance Reform
Flood Insurance Summary of Coverage