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Flood Insurance: Moving Forward

July 18, 2017 - Over the past two weeks there have been two important developments related to the reauthorization of the National Flood Insurance Program (“NFIP”) which runs out on September 30, 2017.  First, the Senate Banking Committee published the text of a bipartisan reauthorization bill.  Unfortunately, unlike reauthorization bills that passed through the House Financial Services Committee (“HFSC”) in May (discussed in our May 18th post), the Senate bill would not reverse a burdensome provision in the NFIP that requires banks to ensure that real property collateral securing a commercial loan that is located in a federally designated flood zone be adequately insured.  The second, more hopeful event, reported in the press late this week, is that opposition to the bills passed in the House has been resolved through a compromise proposed by the leadership of the HFSC.

As reported in The Hill, the Senate bill, which would extend the NFIP for six years, contains many similar provisions to a series of bills passed by the HFSC June.  The bill directs FEMA to develop flood area risk mitigation strategies and update flood mapping procedures, places caps on NFIP premiums and deductibles and mandates the use of higher actuarial rates over time.  Unlike the House bills, the Senate proposal does not encourage the development of private flood insurance, and, as noted about, does not, like one of the bills passed in the HFSC, limit mandatory insurance coverage to residential properties.

As we noted in May, the mandatory commercial insurance requirement means that banks are required to ensure that collateral located in a flood zone is insured even if the real estate is not a meaningful or material part of the collateral package.  Often the burdens far outweigh the value.  On May 1st, Rep. Blaine Luetkemeyer introduced a bill (H.R. 2246) to “repeal the mandatory flood insurance coverage requirement for commercial properties located in flood hazard areas.”  Since commercial flood insurance represents only a small portion (about 6%) of the overall NFIP, it is still possible that this carve-out proposal will survive and that the burdensome flood insurance requirements will be washed away. While, as the Washington Post points out, the politics around the NFIP are very complex, often driven more by geography than party affiliation, the chances that the carve-out for commercial loans survives appear to be improved by the compromise reached in the House.  Nevertheless, whether or not the final product contains a carve-out for commercial loans remains very unpredictable.

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