“Above-Normal” Hurricane Season Forecast Means Coastal Real Estate Owners and Buyers Need to Consider Insurance Options NOW

An ongoing La Nina and above-average Atlantic Ocean water temperatures are leading the National Oceanic and Atmospheric Administration (NOAA) to forecast an above-normal hurricane season. “NOAA is forecasting a likely range of 14 to 21 named storms (winds of 39 mph or higher), of which 6 to 10 could become hurricanes (winds of 74 mph or higher), including 3 to 6 major hurricanes (category 3, 4 or 5; with winds of 111 mph or higher), according to an agency news release.

With this extreme threat level, owners of coastal real estate and even those well inland in the Eastern U.S. and Hawaii who could be impacted by flood and wind damage from a degrading storm, need to review their insurance coverage. Considering scientists are reporting that global warming and sea level rise are super-charging hurricanes and tropical storms, people who own real estate in at-risk regions should put this on the top of their to-do lists.

Lenders require homeowners with mortgages to purchase basic dwelling coverage that covers the cost of repairs to a damaged home. In areas vulnerable to hurricanes and flooding, lenders may require special windstorm and flood insurance.

Considering that FEMA’s flood maps are notoriously outdated and homes well outside the designated flood zones have been damaged by flood waters in past storms, it’s important for homeowners in areas with even a seemingly remote chance of getting hit by floods to consider purchasing coverage through the National Flood Insurance Program. For example, in August 2017, thousands of homes outside the FEMA-designated primary flood zone flooded when Hurricane Harvey rolled over the Houston area.

With insurance costs skyrocketing in many coastal areas due to increased claims from past hurricanes and storms, fraud and other reasons, some homeowners are going without insurance. They tend to fall in two camps those who are gambling that their properties will not get hit by a hurricane or tropical storm and those who believe they have enough reserve funds to cover the cost of repairs if they do.

These homeowners need to be aware that waiting until a storm is likely headed their way to purchase insurance won’t work. Flood insurance purchased under the National Flood Insurance Program won’t actually kick in until 30 days after a policy is purchased. In addition, if a tropical storm or hurricane watch or warning is issued in a 16,000 square mile box around Florida, the state’s Citizens Property Insurance Corporation and most private insurance companies will not accept applications for new coverage. Insurers in other states may have their own last-minute purchase limitations. There’s also a risk that providers may not be able to process applications made before a storm in a timely manner.

When property owners are reviewing their insurance policies, they should also revisit their coverage amounts. With inflation, even $250,000 in coverage won’t provide as much repair and rebuilding purchasing power as it used to. They should also double-check their deductibles to make sure they’re still in line with their financial resources.

Evaluating homeowners, flood and wind insurance can be drudge work under the best of circumstances. However, with the high risk of storms and recent years of climate change super-charged storms wreaking record destruction on coastal real estate and points far inland, not doing your homework can lead to serious negative consequences should a storm hit your property.

With Hurricane Season Approaching, Now’s the Time to Purchase Flood Insurance

Hurricane season 2022 officially begins on June 1, and it’s expected to be a busy one.

With climate change and sea level rise intensifying tropical storm and hurricane rains and storm surge, now is the time for real estate owners in coastal communities and well inland to consider purchasing flood insurance — if they haven’t already. This is especially important because standard homeowner’s insurance policies do not cover flooding.

Property owners who plan to wait until a storm is aimed at their region to purchase flood insurance are making a big mistake. New policies under FEMA’s National Flood Insurance Program take 30 days to take effect.

Property owners who purchase properties using government-backed mortgages are required to purchase flood insurance policies. Many owners who purchased their homes using cash self-insure their properties. Some owners who are self-insured are under the mis-impression that because they’re located outside of designated flood zones that they shouldn’t be concerned about flooding. This can be a costly mistake. Estimates are that 25% of flood damage occurs in low-risk flood zones. An extreme example of this hazard is the fact that more than half of the homes that flooded in Houston, TX, during Hurricane Harvey were located outside designated flood zones.

Flood insurance policies cost on-average $700 a year, though FEMA has started to place a heavier premium burden on properties built in higher risk areas. The policies cover up to a quarter million dollars in damage. Buyers should also be aware that a seller’s flood insurance policy can be transferred to them at closing often at a significant savings.

Flood insurance is clearly worth purchasing. According to FEMA’s Flood Damage Cost Estimator, one inch of floodwater can cause up to $25,000 in damage and one-foot up to $72,000. As building materials and labor have become much more expensive in most regions of the country, these estimates are most likely on the conservative side.

Owners and buyers of real estate at risk of flooding can get more information about National Flood Insurance Program policies from the National Flood Insurance Program website.

Hundreds of Flood Survivors Demand that FEMA Do More to Protect Them from Climate Change-Driven Natural Catastrophes

The Federal Emergency Management Agency (FEMA) asked for public input on changes to the National Flood Insurance Program (NFIP) last fall. Over 300 people hit by flooding are responding by signing a petition drafted by Anthropocene Alliance — a nonprofit group “fighting for climate and environmental justice”.

Anthropocene Alliance doesn’t mince words in the petition, which is addressed to FEMA Administrator Deanne Criswell. In the introduction, the group states clearly, “We are flood survivors, and we are angry.”

“We’ve witnessed death and destruction from Hurricanes Harvey, Florence, Laura, Sally, Sandy, Matthew, Irma, Delta, and Zeta, as well as from overland flooding in the Midwest,” the petition states.  “We’ve lived without electricity, running water, and secure shelter. We’ve heard our children cry from the absence of friends, school, and safety. And we’ve confronted homelessness, illness, and mind-numbing red tape from insurance companies and government agencies.”

The petition makes very specific demands of FEMA, including:

  • Stop allowing developers, disreputable planners, engineers and politicians to use the NFIP to encourage building in flood zones that puts the new properties and surrounding properties at risk of flooding.
  • Stop paying for the repair of property that floods repeatedly and, instead, “prioritize mitigation measures such as elevation, home buyouts, and community relocation.”
  • Start planning now to relocate whole towns and cities threatened by sea level rise flooding.
  • Improve the accuracy of FEMA flood maps that take climate change and sea level rise into account.
  • Require states to to pass uniform seller’s disclosure laws that clearly state a property’s flood risk in order for properties in the states to be eligible for coverage under the NFIP.
  • Set NFIP premiums that adequately reflect flood risk, and ensure it’s “affordable and accessible to low-income households until such time that the communities can be moved out of harm’s way.”
  • Make buyouts more desirable by covering the true cost residents of areas that flood will have to pay to move to areas free of flooding.
  • Protect or restore natural barriers to flooding, such floodplains, wetlands, forests, watersheds, salt marshes and beaches.

In the closing paragraph of the petition signed by Harriet Festing, Anthropocene Alliance’s executive director, the group encourages FEMA to open a dialogue with them.

“The flood survivors below all believe that for our children to have a safe and healthy planet, we need to quickly end fossil fuel use and transition to an economy focused on the satisfaction of real, human needs,” the petition states. “At the same time, provision must be made to protect individuals and communities from present and future harms due to more intense storms, rising sea levels, subsidence, bad development, and flooding.”

With so much at stake, buyers, sellers, owners and real estate agents in coastal areas need to band together with groups like Anthropocene Alliance to pressure the federal, state and local governments to do what’s right for all property owners in coastal areas susceptible to sea level rise flooding. Voting for candidates who not only recognize the challenges posed by climate change and sea level rise flooding but who are prepared to do something about them is also essential.

Insurers and Mortgage Providers Are Shifting Sea Level Rise Flooding Risk to Government-Run Programs and, Ultimately, Taxpayers

A recent article by Naveena Sadasivam published in Grist examines in-depth the way insurance companies and mortgage providers are shifting the risk from sea level rise flooding and other climate change-related disasters to government run insurers and, ultimately, taxpayers. This could have grave consequences for coastal real estate markets.

There are several mechanisms they’re using to unburden themselves of the risks, according to the Grist article. One way is for private insurers to abandon risky areas, leaving states with subsidized state insurance programs — such as California, Florida and Texas — to pick up the burden. Another way is for mortgage providers to make loans in high-risk areas and then sell them to Fannie Mae and Freddie Mac, which guarantee about 50 percent of the country’s $10 trillion mortgage market.

Unfortunately, many of the state-subsidized insurance programs are underfunded. If a natural disaster hits, they could go broke, leaving taxpayers to pick up the tab. The Fannie Mae and Freddie Mac mortgage programs are also at risk of being destroyed from disasters. If they fail, taxpayers will likely have to cough up billions of dollars in bailout money.

According to the Grist article, “Experts say if these climate risks are left unaddressed, the combined effects could ripple across the economy in ways that mirror the subprime mortgage crisis of 2007.”

Mortgage providers require buyers and owners to purchase flood insurance. If insurance becomes prohibitively expensive or unreliable, coastal real estate markets could lock up and property values could plummet.

Sea Level Rise Poses Challenges for Commercial Real Estate

Residential real estate isn’t the only sector facing challenges from the threats posed by climate change and sea level rise flooding. Commercial real estate is under pressure, too.

According to a report recently released by Dechert LLP, a global law firm that advises corporations, financial institutions, sovereign states and wealthy individuals, “Climate change is forcing the commercial real estate industry to re-think the effectiveness of flood insurance that developers, lenders and investors have relied on for decades.”

The report notes that extreme weather and sea level rise flooding are pushing the commercial flood insurance system “to a breaking point.” Specifically, the report notes that 14 weather and climate disasters in the United States resulted in $91 billion in damages. Each event had losses exceeding $1 billion mostly from damage to residential and commercial real estate.

Among the challenges faced by the commercial real estate sector discussed in the report:

1) The National Flood Insurance Program (NFIP) administered by Federal Emergency Management Agency is financially unstable. The program is now running over $20 billion in the red, and it relies on government bailouts to continue to operate. Its authority to operate is due for renewal next fall. If it’s not renewed the report says, “The potential for disruption is most concerning for property owners in special flood hazard areas seeking mortgages from federally-backed entities and federally regulated banks because flood insurance is legally required for these loans.”

2) FEMA’s flood maps, which are supposed to identify a commercial property’s exposure to flood risk, are notoriously outdated and they do not consider sea level change or increased flooding estimates. “This has led to costly and catastrophic errors,” the report says. “For example, in 2018, at least 140 Florida homes were demolished following the destruction of Hurricane Michael. However, the relevant FEMA flood map reflected that the properties were in flood zone X (0.2% chance of flood in any year) and flood insurance was not required.”

3. Flood insurance only covers damages, not loss of value. The report says this is a problem because as properties become increasingly vulnerable to flooding, the will inevitably lose value over time. “The worst-case scenario here is particularly bleak,” the report says. “Billions of dollars of real estate will be underwater not only in terms of their market value being less than the outstanding mortgage debt, but also because these properties will be at greater risk of someday being literally underwater. Refinancing these mortgages and insuring these properties will undoubtedly become more challenging each passing year.”

The report goes on to explain how uncertainty in the flood insurance market is leaving the the commercial real estate finance industry without a “uniform strategy to underwrite the increased frequency and severity of flooding due to climate change.” The report says the public and private flood insurance industry “will soon be forced to adjust to face the environmental and economic realities of a country more prone to frequent, catastrophic and repeated flooding.”

The authors predict that the commercial real estate finance industry will evolve to meet the challenges to the marketplace. They identified several issues that need to be monitored: “Among the questions are whether the National Flood Insurance Program will be reformed, whether private flood insurers raise their rates to levels only wealthy real estate sponsors can afford, and whether banks and real estate bond buyers will call for more detailed disclosure to more accurately balance the risk of loss.”

The Dechert LLP report focuses on the commercial real estate industry, but most of its discussions, conclusions and warnings also apply to residential real estate. Buyers, sellers, owners and real estate agents in coastal areas should take the time to read this insightful report to better understand the broader issues that will impact their local real estate markets and property values.

FEMA’s Updated Flood Maps Will Impact Flood Insurance Premiums in South Florida

The Federal Emergency Management Agency (FEMA), which administers the National Flood Insurance Program, has been touring South Florida to inform real estate owners about how proposed flood maps based on the latest data will impact their flood insurance premiums.

Owners whose property is included in flood zones will pay higher premiums under the new maps that will take effect in 18 months to two years. Experts recommend that they purchase flood insurance now, before insurance premiums spike under the new designation. If they act now, they will not have to pay the substantially higher rates new policy buyers will have to pay as their existing policies will be grandfathered in when the zones change.

The new maps aren’t all bad news. With the new data removing some properties from flood zones, some lucky owners may actually see a reduction in flood insurance premiums.

People involved in real estate in coastal areas need to keep in mind that FEMA maps don’t consider future sea level rise or king tide flooding. Buyers especially need to perform due diligence to find out if a property experiences sea level rise flooding or may experience flooding in the period they expect to own it. Not knowing a property’s flooding status could result in a loss of property value and higher carrying costs, including maintenance, flood insurance, taxes and condo and homeowners association fees.

Local governments have officials who can help property owners who missed the FEMA meetings to decide what to do next.

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