National Flood Insurance Program

National Flood Insurance Program

The National Flood Insurance Program (NFIP) is a federal program. Participation is voluntary, but the benefits are considerable. To join, a community agrees to adopt, administer and enforce a floodplain management ordinance that meets or exceeds the minimum requirements. When communities participate in the NFIP, property owners and renters can buy flood insurance to help deal with losses from flooding.

Federal flood insurance is designed to provide an alternative to disaster assistance and disaster loans. Disaster assistance is a poor choice; it never comes close to covering all the costs of repairing homes and businesses. It is especially important to remember that disaster assistance is available only after a flood is declared a major disaster by the president of the United States.

Federal flood insurance also is a better alternative than disaster loans that are made available only when a disaster declaration is made by the president or by the Small Business Administration. Loans require repayment, typically over a 10-year period. Insurance will pay whenever damage from a qualifying flood event occurs. This page gives some background about why the NFIP was created and how the program is structured.

Meeting the Need for Flood Insurance

For decades, the national response to flood disasters generally involved constructing flood control works such as dams, levees, channelizations and sea walls. After major floods, the federal government stepped in and gave disaster assistance to flood victims. This approach did not reduce many flood-related losses, nor did it discourage unwise development in high-risk areas. In some parts of the country, it may have actually encouraged additional hazard-prone development. To compound the problem, private insurance companies would not offer insurance against flood damage. Importantly, the messages that nature sent with every flood about how and where to build were often overlooked.

Nearly every county in the country has experienced at least one major disaster declaration. In the face of mounting flood losses and rising disaster relief costs, the U.S. Congress created the National Flood Insurance Program in 1968. The intent was to reduce future flood damage through local floodplain management ordinances and to have people who live at risk help pay for their recovery through an insurance mechanism.

Another important objective of the NFIP was to break the cycle of flood damage. Many buildings have been flooded, rebuilt and flooded again. Sometimes this cycle occurred every couple of years, with people rebuilding in the same flood-prone areas, with the same flood-prone construction techniques.

By encouraging communities to guide development to lower risk areas and by requiring elevation of new buildings and those that sustain major damage, one of the long-term goals of the NFIP can be achieved: create disaster resistant communities. Older buildings may be removed, replaced, upgraded or modified with techniques that lead to little or no flood damage. Through the land development process, developers can often be encouraged to stay out of high-risk areas.

New construction that meets the minimum standards generally has only minimal damage when floodwaters rise. Meeting these performance standards allows people to move back in faster because there is less cleanup and fewer repairs are needed.

The NFIP has helped to foster an important change. In many counties and towns across the country, instead of trying to keep floods away from the people, now we try to keep people and property away from the power and devastation of floods.

Brief History of the National Flood Insurance Program

In 1968, Congress passed the National Flood Insurance Act based on findings that: "(1) a program of flood insurance can promote the public interest by providing appropriate protection against the perils of flood losses and encouraging sound land use by minimizing exposure of property to flood losses; and (2) the objectives of a flood insurance program should be integrally related to a unified national program for floodplain management."

In the late 1960s, federal officials originally estimated that only 5,000 communities had flood hazards. As they looked more carefully at the problem, they determined that more than 20,000 counties and towns have some degree of risk. Today, flood insurance is available in more than 20,000 communities and U.S. territories, including Indian tribes, authorized tribal organizations and Alaska Native villages, that have voluntarily adopted the NFIP requirements. Although federal assistance is still a vital part of disaster response and recovery, the NFIP saves the U.S. taxpayer millions of dollars each year.

Major flood disasters have always had an impact on the NFIP. Hurricane Agnes struck the East Coast in 1972. At the time, there were fewer than 1,200 communities in the NFIP, and only 95,000 homeowners had insurance policies. Hurricane Agnes caused a total of up to $4 billion in damage and affected states from the Gulf Coast all the way to Canada. Less than 1 percent of the damaged buildings were insured, and only $5 million was paid in insurance claims.

After that, it became clear that many flood-prone communities needed more incentive to join the NFIP. Even with the cost of insurance for older buildings subsidized, most people did not purchase policies because they generally didn't think a disaster would hit their towns. The Flood Disaster Protection Act of 1973 was passed, and its most significant impact was the mandatory purchase requirement. Since then, mortgage lenders and banks were supposed to require that borrowers obtain flood insurance on homes located in mapped floodplains.

In 1981, the Reagan administration set a goal to make the NFIP self-supporting by 1988. That would mean that no taxpayer support is needed to pay claims and operating expenses. One step toward that goal was a decrease in the amount of subsidy for older buildings. In addition, rates were increased and coverage of certain items in basements was sharply limited. These measures, combined with a number of years without major floods, allowed the NFIP to achieve self-supporting status in 1985, three years before the target date.

In 1989, Hurricane Hugo hit South Carolina. Flood insurance payments totaled nearly $350 million -- about 35 percent of the $1.1 billion in federal disaster support. Other major floods have prompted significant payments for flood insurance claims, helping thousands of home and business owners recover without burdening the federal government and taxpayers. Some notable events include the Midwest floods of 1993 with $271 million in claims, Hurricane Georges (1998, $149 million), Hurricane Allison (2001, $1.1 billion) and Hurricane Isabel (2003, $421 million).

Through those major flood disasters and thousands of small events, the NFIP is certainly doing what Congress anticipated -- saving taxpayer dollars.

The most important reason the NFIP works is because properly built homes do not get damaged, or at least they are damaged much less than if they had been built flat on the ground. On average, buildings constructed in compliance with NFIP floodplain rules sustain 77 percent less damage than those that are not built properly.

In 1998, the NFIP celebrated its 30th anniversary. Through successful partnership with the private insurance industry, the NFIP provides efficient service to flood insurance policyholders. Through partnerships with communities, the NFIP supports both damage reduction and preservation of natural and beneficial floodplain functions.

The Mandatory Purchase Requirement

From 1968 until the adoption of the Flood Disaster Protection Act of 1973, the purchase of flood insurance was voluntary. However, in 1973 Congress decided to make flood insurance a requirement for many properties. For the first time, regulated lending institutions were not supposed to make, increase, extend or renew any loan secured by improved real estate or located in a special flood hazard area unless the secured property and any personal property securing the loan was covered for the life of the loan by flood insurance. Congress decided to make the purchase of flood insurance a requirement because so few flood-prone structures were covered by flood insurance, and too many people continued to need federal disaster relief.

In 1988, Congress began to consider more changes to the NFIP. Flooding along the Mississippi River in 1993 prompted further evaluation, and the National Flood Insurance Reform Act was passed in September 1994. It included a significant boost to improve compliance with the mandatory purchase requirements of the NFIP by lenders, servicers and secondary market purchasers. Increasing compliance and participation in the NFIP is designed to decrease the financial impact of flooding to the federal government, taxpayers and citizens in areas prone to flooding.

Additional information about the mandatory purchase requirements is in the Federal Emergency Management Agency (FEMA) booklet entitled Mandatory Purchase of Flood Insurance Guidelines.
Some materials may be accessible on FEMA's Web site at www.fema.gov; just search on "Mandatory Purchase."

Administrative Structure of the NFIP

The Community Status List for Kentucky is updated regularly on FEMA's Web site. In addition to listing each participating community in the NFIP, it lists the communities that have identified Special Flood Hazard Areas (SFHAs), but which do not participate. Also listed is the date of entry for each community, as well as the date of the current effective maps.

Emergency Phase. Until recently, the Emergency Phase of the NFIP was the initial phase of participation. It was designed to provide a limited amount of insurance at less than actuarial rates. A community in the Emergency Phase either does not have an identified and mapped flood hazard or has been provided with a Flood Hazard Boundary Map.

Adoption of a limited floodplain management ordinance is required. About 1 percent of the nearly 20,000 communities participating in the NFIP remain in the Emergency Phase, including nine of Kentucky's 312 participating communities.

In the Emergency Phase, only limited flood insurance coverage is available. Single-family dwellings are eligible for $35,000 building coverage and $10,000 contents coverage. Other residential, nonresidential or small business structures are eligible for $100,000 building coverage and $100,000 contents coverage.

Regular Phase. Usually a community participating in the Regular Phase of the NFIP is provided with a Flood Insurance Rate Map (FIRM) and a detailed engineering study, termed a Flood Insurance Study. Under the Regular Phase, more comprehensive floodplain management requirements are required in exchange for higher amounts of flood insurance coverage. Law establishes the maximum amounts of coverage.

As of 2004, residential structures are eligible for $250,000 building coverage and $100,000 contents coverage. Nonresidential structures are eligible for $500,000 building coverage and $500,000 contents coverage.

To find out more about flood insurance, download the booklet Answers to Questions About The National Flood Insurance Program from FEMA's web page. To order the booklet, call the FEMA Distribution Center (1-800-480-2520).

Some general information is available on the Internet at www.floodsmart.gov. Use this site, or call the NFIP toll-free hotline (1-888-379-9531), especially when people have questions about where and how to buy flood insurance.

What Does it Mean to Not Participate in the NFIP?

Communities with SFHAs that choose not to participate -- or that withdraw or have been suspended -- probably do not regulate flood hazards to the NFIP minimum requirement. They may cause undue difficulties for their citizens, especially in the aftermath of a damaging flood event. The following apply to nonparticipating communities:

Federal flood insurance is not available.
Federal agencies shall not make grants or loans for buildings in identified flood hazard areas, including agencies such as Farmer's Home Administration (FHA), Housing and Urban Development (HUD), Environmental Protection Agency (EPA), Small Business Administration (SBA) and Health and Human Services. This rule applies to federal grants and loans for any reconstruction, repair, construction, rehabilitation or additions to structures in SFHAs.
Federal disaster assistance will not be provided in identified flood hazard areas for permanent restorative construction and grants. This means that public buildings damaged by flood are not eligible for federal disaster assistance.
Federal mortgages shall not be available for structures in identified flood hazard areas, including loans or grants guaranteed by FHA, Veterans' Administration, SBA and federal instrumentalities such as the Federal Deposit Insurance Corporation and the National Credit Union Administration.
The National Flood Insurance Reform Act of 1994 places restrictions on conventional loans, and lenders must notify the buyer or lessee if a property is in a flood hazard area.
The Flood Insurance Rate Map and appropriate actuarial rates go into effect regardless of whether the community participates. Structures in SFHAs will be actuarially rated if the community later decides to join the NFIP. This could lead to extremely expensive insurance.
The local governing body may be held liable for not participating in the NFIP because the action denies citizens the opportunity to purchase flood insurance and does not take positive steps to reduce the exposure of life and property in the face of authoritative scientific and technical data.

NFIP Sanctions for Violations of Community Agreement

When your community agreed to participate in the NFIP, it adopted an ordinance with minimum criteria and agreed to enforce it to reduce future flood damage. In return, flood insurance and other forms of federal assistance are made available. If a community fails to uphold and enforce its ordinance, then FEMA can impose sanctions.

Examples of deficiencies and violations that FEMA considers serious enough to place a community on probation include:

Failure to require permits for all construction, subdivisions and other development in flood hazard areas.
Failure to obtain and reasonably utilize flood hazard data.
Adoption of ordinance provisions that are inconsistent with the minimum requirements of the NFIP or that do not contain adequate enforcement provisions.
Application of procedures that do not reasonably ensure compliance.
Poor permit reviews that allow noncompliant activities.
Failure to correct violations to the extent practicable.
A pattern and practice of issuing variances that are inconsistent with the NFIP variance criteria.
Allowing enclosures below elevated buildings to be converted in ways that are not in compliance with the ordinance.

Probation. FEMA looks for "substantive and multiple" deficiencies and/or violations before undertaking probationary action. Probation puts a $50 surcharge on all new and renewed flood insurance policies. Importantly, FEMA is required to notify all policyholders that poor compliance is the reason for the extra charge. FEMA and the state will closely monitor progress toward correcting the problems that led to probation, which lasts for a minimum of one full year. It may be continued beyond that if necessary. Probation is the precursor to suspension.

Suspension. Communities may be suspended from the NFIP for failure to correct any of the problems which led to probation. In order to be reinstated, a community must correct or mitigate identified violations to the fullest extent possible and institute acceptable administrative and enforcement procedures.

A community may be suspended without probation if its ordinance is not updated when required. FEMA and the state work with communities to revise ordinances. Ordinance revisions may be prompted by a map revision that requires a more stringent ordinance. If FEMA revises the standards in the NFIP regulations (Section 60.3), all communities must update their ordinances.

New flood insurance policies may not be written and existing policies may not be renewed in suspended communities. This will severely restrict the availability of mortgages and other loans, federal grants and disaster assistance. If an insurance agent mistakenly writes a policy in a suspended community, FEMA is not required to pay a subsequent claim and will reimburse premiums paid after suspension took effect. This has caused a great deal of distress after floods, when homeowners find out that the insurance they thought they had is not valid. Insurance agents who continue to write policies in suspended communities may be held liable for uninsured losses.

Corrective Measures. If FEMA or the state discover deficiencies or violations, community officials will need to take appropriate action to correct them. Corrective actions include:

Demonstrating that a structure is not in violation by providing missing permit information.
Rescinding permits for structures not yet built or in early stages of construction.
Demolishing or modifying noncompliant structures or removing fills in the floodway.
Seeking civil/criminal penalties.
Submitting information to FEMA to deny flood insurance to specific buildings under Section 1316 of the NFIP.