The rules for flood insurance have changed. The “Biggert-Waters Flood Insurance Reform Act of 2012,” signed into law last July, is intended to eliminate federal subsidies for flood insurance. The goal is to put the National Flood Insurance Program on a sound financial footing, where premiums for insurance can cover the claims paid out — and, as a side effect, to remove the incentive that cheap insurance creates for people to build in risky locations near rivers, lakes, and oceans.

Biggert-Waters removes the federal insurance subsidy for a wide range of properties, including second homes and business properties, and it calls for premiums to increase by 25% a year until the premiums reach a level that will enable the NFIP to continue operations without the Congressional bailouts that have become routine since Hurricane Katrina.

The new policy is proving to be a rude surprise for property owners, buyers, and sellers in coastal areas, reports the New Orleans Times-Picayune (“Changes to flood insurance program ends federal subsidies,” by Richard A. Webster).

Insurance broker Thomas McMahon told the paper that the significance of Biggert-Waters dawned on him when he was advising a client who wanted to sell a building to a friend. “The sale was a lock until the buyer's flood insurance agent looked over the new law and told his client that if he purchased the building his rate could increase to as much as $27,000 annually,” reports the Times-Picayune. “The current flood insurance policy on the building was $4,000 a year and under the old rules the buyer could simply assume that same rate.”

The deal fell through, McMahon told the paper: “His friend could swing the note but not the flood insurance."

Biggert-Waters will change the game radically for properties in Federally-designated flood zones, the Times-Picayune reports: “Starting Jan. 1, premium rates for subsidized non-primary residences will increase 25 percent per year until they reflect a rate that is equivalent to the full flood risk. Later in the year, rates will increase for additional properties including businesses, substantially damaged or improved properties, severe repetitive-loss properties, and any property that has incurred flood-related damages where claim payments exceed the fair-market value of the property.”

Some properties will experience an even sharper transition, the paper notes: “The new rates will automatically kick in with no phase-in period for flood zone properties under the following conditions: after a lapse in insurance coverage, a change in ownership, or if there is substantial damage or improvement to the building.”

It’s hard medicine to swallow. But Rick Haase, president of Latter & Blum Inc., told the Times-Picayune that the reforms are necessary: "You might criticize the process, but the direction is absolutely necessary, otherwise we'd be in situation where [the flood insurance program] may go away, and that would be a calamity."