Post-Sandy, Can Flood Insurance Cope with the Losses?

Except for downed trees and power outages, Hurricane Sandy's wind damage was relatively modest. Most of the storm's catastrophic impact was caused by flooding. And for homeowners, as well as for local economies, that is bad news.

The New York Times reported on the problem last week ("For Flood Victims, Another Blow Is Possible," by Edward Wyatt and Mary Williams Walsh): "Home and business owners across a dozen states awoke on Tuesday to an unpleasant reality: significant portions of their property damage caused by flooding from Hurricane Sandy are unlikely to be covered by insurance."

To begin with, most homeowners in the Northeast aren't insured against floods, the Associated Press reports ("Flood Insurance In Northeast Is Rare," Huffington Post report by Mark Jewell - Associated Press). "Even with the expanded coverage following Irene, the vast majority of Northeasterners responding to the latest industry survey do not have a flood policy," says the story. "That means if they suffer flood-related damages from Sandy, they will likely have to foot the bill. That's because typical homeowners and renters policies don't cover flooding."

Even for homeowners who do carry flood insurance, policy limits are tight: just $250,000 for a single-family house, plus $100,000 for contents. In many cases, that amount won't cover replacement cost — especially when you consider that if the cost of repair exceeds 50% of the building's value, the law typically requires the repaired structure to be lifted above the location's Base Flood Elevation.

But there's another, bigger issue: the FEMA-run National Flood Insurance Program (NFIP) itself is not solvent. The program takes in revenue from premiums paid by policyholders, but in 2004 and 2005, a series of hurricanes including Hurricane Katrina overwhelmed the NFIP's reserves. Congress provided about $20 billion to bail the NFIP out, but the program is supposed to pay that money back. NFIP, in other words, is broke and in debt. And losses from Sandy may use up all the program's cash on hand.

CNN Money has the story: ("FEMA may not have enough for flood damages," by Jennifer Liberto). "Currently, insurance experts say FEMA's flood insurance program has access to funds totaling $3.8 billion, much of it in loans," the network reports. "If flood claims exhaust the fund, Congress may have to step in with additional taxpayer money."

In the aftermath of the storm — and today's election — NFIP is likely to become a political football, with various interests jumping in to press for changes in national floodplain policy, according to a report on Congress-watching website The Hill ("After Sandy, flood insurance reformers spring into action," by Zack Colman.

Conservatives want FEMA to boost premiums faster, and to purchase "reinsurance" from private-sector companies, which would back up the NFIP's fund in case of overdrafts. Environmental groups, meanwhile, want the program to stop insuring development in sensitive coastal areas. If the NFIP tap runs dry, the pressure to achieve greater reforms may grow, says The Hill.