Can Private Insurers Save the National Flood Insurance Program?

Author: Nathan Berkeley

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January 12, 2018 4:12pm

In the wake of a longstanding split between Florida’s Second District Court of Appeal and Third District Court of Appeal in how to assess insurance coverage, the Florida Supreme Court’s decision in Sebo v. American Home Assurance Co., 208 So.3d 692 (Fla. 2016), will likely have a substantial and enduring impact on insurance coverage in Florida. The decision to seemingly adopts the “concurrent cause doctrine” as the standard for settling insurance disputes in situations where covered and uncovered causes of a harm are independent of each other and the loss would not have occurred but for the joinder of the two. The Florida Supreme Court reasoned the competing “efficient proximate cause doctrine” was inefficient in settling disputes where there was no reasonable way to distinguish the insured’s property loss.

While the Florida Supreme Court’s ruling in Sebo represents a victory for insureds, the ongoing questions surrounding the federal government’s reauthorization of the National Flood Insurance Program (“NFIP”) (and the potential modifications thereto), creates a cloud of uncertainty over the scope and availability of home owner’s insurance in Florida.

President Johnson signed NFIP into law in 1968 to offer government-backed insurance coverage to homes in flood-prone areas. When Congress established NFIP, it hoped to revive the private flood-insurance market by pooling their capital with the federal government in an effort to ensure high-risk homes. Eventually there were conflicts and the federal government took over in full and independently set rates, mapped floodplains, wrote policies, and bore all risks of loss associated with being an insurer.

Today, NFIP is virtually the only source of flood insurance for more than five million households in the United States. As of 2016, NFIP was the insurer of 1,779,537 policies in the State of Florida[1] (nearly three times as many as Texas, the second most insured state under NFIP). Given these figures, the reauthorization of NFIP is a borderline necessity to the very existence of many parts of Florida.

Congress has debated countless modifications to NFIP including rate increase caps,[2] incentivizing and/or sanctioning communities based on their flood preparedness, and even purchasing high-risk properties from repetitive loss claimants.[3] While these ideas all have merit, the proposal most likely to lead to the long-term success of the program may be a renewed focus on working in concert with private insurers to issue flood insurance policies in these high-risk areas.

One of the most supported proposals is a renewed effort to share risks with private flood insurers. Conservative commentators have suggested a scenario where private insurers either provide primary coverage to a majority of policyholders, or they acquire the transferred risk from NFIP by way of reinsurance, or private insurers and the NFIP jointly underwrite primary flood risk and pool any reinsurance would all be feasible.[4]

As it stands now, NFIP premiums do not reflect the full risk of loss. Requiring all rate subsidies to reflect the full risk of loss[5] would seemingly be the only way to encourage increased private insurer involvement (as rates would assuredly rise).

With the ultimate inevitability of substantial losses in a state like Florida, one has to wonder whether any of the suggestions above will ultimately motivate private insurers to offer flood insurance.

But maybe Sebo is just the impetus for reluctant private insurers to re-enter the flood insurance market in a high-risk state such as Florida. With the “concurrent cause doctrine” now bona fide Florida law, it would seem to make sense for private insurers to provide more comprehensive home-owner policies that cover flood damage. To the extent lobbying efforts to repeal NFIP subsidies are successful, insurers should be able to pass these costs directly to homeowners.

[1] https://www.fema.gov/media-library-data/1486576410889-86f20c503a8f99916cb8e7c7d62338e4/Policies_in_force_Sept2016.pdf

[2] https://www.marketlace.org/2017/12/15/sustainability/congress-faces-deluge-fixing-flood-insurance

[3] www.nrdc.org/sites/default/files/climate-smart-flood-insurnce-ib.pdf

[4] https://www.americanactionforum.org/solution/reauthorizing-national-flood-insurance-program/

[5] Recommended by the United States Government Accountability Office in its April 2017 report. https://www.gao.gov/assets/690/684354.pdf

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