Zelle  LLP

President Trump recently declared the flooding throughout the Gulf Coast a National Emergency and pledged federal resources, including FEMA, to assist with the recovery efforts. All the while, one of the linchpins in flood-related national disaster preparedness – the National Flood Insurance Program (“NFIP”) – faces a disaster of its own.
The NFIP was created in 1968 to regulate flood plain development and make flood insurance more available and affordable for property owners. Prior to the program, flood insurance was expensive and hard to come by. Insurance companies struggled to underwrite this risk because of a dearth of government data. NFIP has generated some data to assist companies in understanding this risk, enabling some insurance companies to enter the market.
Under the purview of FEMA, the NFIP offers flood insurance, often administered by private insurance companies, while the government assumes the risk. The NFIP has successfully increased the proportion of homeowners and businesses in flood-prone regions with flood insurance. Even though some private insurers have begun to underwrite non-NFIP policies, NFIP policies still represent a clear majority of the flood insurance market.
The NFIP is crucial to the flood insurance market and to millions of policyholders, including those in the Gulf Coast recently affected by the latest flooding. However, the program is presently burdened by an unsustainable debt. Despite a 2017 bailout of $16 billion, the program currently owes more than $20 billion and is prohibited from borrowing in excess of $30 billion.
The NFIP also faces another peril: federal re-authorization. This past week, the NFIP was renewed until September 30, 2019. The previous deadline was May 31, 2019, which was then extended by only 2 weeks. In the event of non-renewal, the NFIP assures its policyholders that it will still honor claims, but cautions that it will stop writing new policies and renewing existing policies. In the 50 years it has existed, the NFIP has weathered criticisms and remains a cornerstone of national flood response. Should the NFIP stop insuring flood risk, premiums will rise, and underinsurance of flood risk will only rise. Inevitably, this underinsurance will further strain government resources, including FEMA.
Even if the NFIP is continually renewed through short-term extensions, the flood insurance market – including its policyholders – will suffer from the uncertainty. Combined with near-maximum debt levels, this destabilizing force is certain to adversely affect policyholders.
Many of the areas of the Southeastern U.S. hardest hit by recent flooding, especially in Arkansas, have been evacuated. Information will be pouring in over the next days and weeks about the extent of the damage. And in addition to the problems in the Gulf States, heavy rains throughout the Midwest – in some cases “a month’s rain in a single day” – have collected into the Mississippi and Arkansas Rivers, whose banks cannot contain the waters. These waters have also overwhelmed levees and dams causing widespread crop and property damage. As the flood waters recede, rapid remediation will be necessary to avoid further consequences of the storm, including mold, erosion, damaged crops, and restoration of services.
As information filters in from the Gulf Coast states, one fact is certain: there will be numerous flood insurance claims, especially to the NFIP for property damage, repairs and business interruption. This deluge of claims is certain to further test the already vulnerable NFIP. As policyholders, insurance companies, governmental agencies, and the nation engage in the complicated and difficult work of assessing and addressing the damage of this catastrophe, uncertainty about the NFIP is an unwelcome distraction.
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