Steep hike in flood insurance rates strikes rural areas

The levee of the Cosumnes River broke in several places causing major flooding in the area of Wilton on Jan. 2, 1997.
The levee of the Cosumnes River broke in several places causing major flooding in the area of Wilton on Jan. 2, 1997. Sacramento Bee file

Big changes in federal flood insurance policy are beginning to strike in the Sacramento area, in some cases quadrupling the cost of coverage and threatening local real estate markets.

The changes are not expected to affect urban areas such as the city of Sacramento. But rural areas are already feeling the pain, and it is expected to worsen.

In the Point Pleasant area south of Elk Grove, Walter Hoppe recently learned that flood insurance for his 1,500-square-foot home will increase from $800 to $4,500 per year. The increase hasn’t been imposed yet, but it will likely hit the next owner of his home.

“Obviously, we’re not too happy,” said Hoppe, who has owned his home since 1970. “That’s a tremendous increase.”

On Yolo County’s Merritt Island in the Sacramento-San Joaquin Delta, real estate agent Debbie Elliott is offering a home for sale at $595,000. Flood insurance under the new policies is estimated at $12,079 a year – or about $1,000 per month. That compares to a prior rate closer to $1,000 annually.

“My seller’s property was immediately devalued based on this prohibitive insurance cost,” Elliott said via email. “The decision the seller is faced with is to sell at a discounted price, or to remove the property from the market and wait for the law to be reformed.”

That law is the Biggert-Waters Flood Insurance Reform Act, passed by Congress in July 2012. The intent was to bail out the National Flood Insurance Program from a rising tide of deep debt caused by expensive natural disasters. Before the law was passed, the flood insurance program was $18 billion in debt. Three months after the law passed, Hurricane Sandy swept the East Coast and increased the red ink to $30 billion.

A primary goal of the act is to eliminate long-standing flood insurance subsidies that have resulted in unreasonably cheap insurance for risky properties that are repeatedly damaged and rebuilt after disasters.

But even the original author of the act, Rep. Maxine Waters, D-Los Angeles, now admits it has led to “unreasonable” premium increases for thousands of property owners. She is co-sponsoring a bill to reform her own legislation, along with 59 other co-sponsors – Republicans and Democrats – across the nation.

“The implementation of the law has been done in such a way that the rates for flood insurance have just skyrocketed way beyond affordability,” said Rep. John Garamendi, D-Walnut Grove, whose district has been hit hard by the changes. “Some of my neighbors ... are going to have a very expensive situation.”

The details are complex, affecting different kinds of property and policies at different times. Even officials at the Federal Emergency Management Agency, which oversees the National Flood Insurance Program, are unable to explain precisely when certain aspects of the bill will take effect.

The law primarily affects properties in “special flood hazard areas.” These are generally properties with less than 100-year flood protection. Instead of paying a flat rate for flood insurance, as they have historically, they will now pay an “actuarial” rate based on the depth of flooding they could experience. In most cases, these are small towns and farming areas, not cities like Sacramento.

To set the actuarial rate, FEMA requires the property owner to obtain an “elevation certificate” by hiring a surveyor or engineer at a cost of $400 to $800 per structure.

The first phase of the law took effect Jan. 1, when rate increases began for non-primary residences such as vacation homes, rental properties and business properties. These will see annual increases of 25 percent until the actuarial rate is reached. On Oct. 1, similar increases were imposed on any type of property whenever a new flood insurance policy is started, or if any lapse in coverage occurred after Oct. 4, 2012.

Additional changes are expected in 2014 that will affect more people, possibly including all owner-occupied homes in special flood hazard areas. FEMA officials said they don’t know exactly when these changes will occur or who will be affected. Eventually, if left intact, the law would apply to Sacramento’s Natomas region. But that’s unlikely to happen because levee improvements now underway are expected to remove the area from the flood hazard zone.

The uncertainty and size of the rate increases have led to deep anxiety. This is especially true in the Sacramento-San Joaquin Delta, where property values and livelihoods are already threatened by a state proposal to build two giant water diversion tunnels, which may require thousands of acres of land to be condemned.

Flood insurance is not a casual matter: Most banks require it before granting a mortgage or a farm loan.

“It scares the heck out of people,” said Walnut Grove Realtor Joe Enos. “They get all this information that’s hard to understand. It doesn’t make selling real estate easy because of the anxiety.”

Another change in the law requires agricultural buildings – barns, packing sheds, silos – to be insured at the “actuarial” rate. Previously such structures were generally not insured at all and did not affect insurance rates.

Daniel Wilson, a farmer on Brannan-Andrus Island near Walnut Grove, said this could harm farming in the region, long the primary economic engine in the Delta. For instance, if he wanted to borrow money to convert land to vineyards and build a winery, the flood insurance cost begins to rival the interest charge on a loan.

“Now your 5 percent loan has become a 10 percent loan,” Wilson said. “What it does is it chills my ability to expand my business, at least in the Delta. We have serious conversations about selling farmland in the Delta and buying it elsewhere.”

In the case of a farm building or a small home, the annual flood insurance under the new policies can be 10 to 15 percent of the structure’s value, meaning that over 10 years, insurance costs more than the structure is worth.

“It suddenly becomes economically sensible to tear all the buildings down before you borrow the money so you don’t have to insure them,” he said.

Wilson now pays about $1,000 per year for flood insurance on his own home. If that increases significantly, as the new federal law suggests it will, he said he’ll simply pay off his mortgage so he doesn’t have to carry flood insurance.

That response worries Ronald Stork, a senior policy advocate at Friends of the River in Sacramento who monitors flood insurance policy. The result would be more pain for the National Flood Insurance Program, because fewer people will be paying premiums to support the program, and more will depend on disaster relief in the event of a flood.

Stork said the system needs to be reformed to account for actual risk, which is not the same as potential flood depth. For instance, many residential areas of the Delta do not have a history of repeat flooding, even though they lie in a special flood hazard zone.

“I don’t mind some subsidies in the insurance system if the insurance system is designed to provide incentives for better floodplain management,” Stork said. But even with the new law, he said, “There is no distinction between somebody who floods every year and somebody who might be expected to flood once every 99 years.”

Garamendi is a co-sponsor of the bill intended to clean up the 2012 act. The bill would impose a four-year delay on some policy increases, require FEMA to first conduct an affordability study and take a more risk-based approach to setting policies. He is also a cosponsor, along with Rep. Doug LaMalfa, R-Richvale, of a bill to exempt agricultural buildings.

There are “excellent prospects” for a legislative fix, he said.

“The reason is, every part of America has this problem,” Garamendi said. “It’s a national issue, and it’s one that has severe consequences.”

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