Maintaining Flood Insurance

As a result of flooding events over the past several years, many families and communities are all too familiar with the concept of flooding in Louisiana and homeowners insurance.

One important element that we would like to cover in this article is the “obtain and maintain” insurance requirements for property owners that receive federal financial disaster assistance. The included information here benefits all interested parties, including real estate professionals and consumers.

If you or someone you know has ever received federal disaster assistance as a result of a flooding event, then the information included here is important to pass along. As a real estate professional, we have included a sample PDF disclosure at the end of this article which may be considered for inclusion in listing packets and other related brokerage documents.

The Importance of Flood Insurance

Floods are the nation’s most common and costly natural disaster and cause millions of dollars in damage every year. As many Americans have discovered in recent years, homeowners or renters insurance will not typically cover flood damage. Flood insurance can be overlooked if not in a zone that requires it by the lender. Furthermore, it is important to note that floods can happen anywhere! According to FEMA, more than 20% of flood claims come from properties outside of high-risk flood zones.

If disaster victims maintain a flood insurance policy, flood insurance can pay regardless of whether or not there is a Presidential Disaster Declaration. Otherwise, most federal disaster assistance comes in the form of low-interest disaster loans from U.S. Small Business Administration (SBA) and you have to pay them back. While it is true that FEMA offers disaster grants that don’t need to be paid back, this amount is often much less than what is needed to fully recover a flood loss.

A claim against your flood insurance policy could and often does, provide more funds for recovery than those you could qualify for from FEMA or the SBA–and you don’t have to pay it back.

The Obtain and Maintain Insurance Requirements Under the Flood Protection Act of 1973

To protect the investment of Federal resources invested in the restoration of disaster-damaged facilities and to prevent against future loss, FEMA requires – as a condition of receiving FEMA Public Assistance (PA) funding – those receiving subgrants (called Subrecipients or Applicants) must obtain and maintain insurance. Coverage must at least equal the amount of the eligible damage to the facility receiving Federal assistance.

Therefore, it is important to note that property owners or renters who receive Federal financial flood disaster assistance after a Presidential Disaster Declaration may be required to obtain and maintain flood insurance on the property. The recipient of disaster relief funding who fails to “obtain and maintain” flood insurance may be ineligible for future disaster assistance from FEMA as well as be required to repay disaster assistance previously received.

Furthermore, if you live in a high-risk flood zone, and you’ve received federal disaster assistance in the form of grants from FEMA or low-interest disaster loans from the U.S. Small Business Administration (SBA) following a Presidential Disaster Declaration, you must maintain flood insurance in order to be considered for any future federal disaster aid.

Our colleagues at the Louisiana Realtor Association have offered the following guidance on how to best determine if a property may be required to obtain and maintain flood insurance:

To determine if these “Obtain and Maintain” requirements apply, a property owner or renter should ask the following questions:

1. Have the owners of the property received Federal disaster assistance?

FEMA, SBA, and HUD offer programs which provide individuals, households, businesses, and private nonprofits financial assistance after a disaster. These programs may include residential and commercial property.

2. Is the property being sold or rented located in a Special Flood Hazard Area?

FEMA defines “Special Flood Hazard Area” as “The land area covered by the floodwaters of the base flood is the Special Flood Hazard Area (SFHA) on NFIP maps. The SFHA is the area where the National Flood Insurance Program’s (NFIP’s) floodplain management regulations must be enforced and the area where the mandatory purchase of flood insurance applies. The SFHA includes Zones A, AO, AH, A1-30, AE, A99, AR, AR/A1-30, AR/AE, AR/AO, AR/AH, AR/A, VO, V1-30, VE, and V.”

IF THE ANSWER IS “YES” TO BOTH OF THESE QUESTIONS, THE PROPERTY IS SUBJECT TO THE “OBTAIN AND MAINTAIN” REQUIREMENTS.

FEMA administers Federal Emergency Assistance authorized under Section 408 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act to comply with the National Flood Insurance Reform Act of 1994. Therefore, mandatory flood insurance requirements must be followed for recipients whose damaged property is located in SFHAs in order for the recipients to be
eligible for future assistance. (The “obtain” requirement)

The law precludes Federal disaster assistance related to repair of buildings, including U.S. Small Business Administration disaster assistance loans, if previously received flood disaster assistance was conditioned on carrying flood insurance and no policy is in effect. (The “maintain” requirement)

Failure to “obtain and maintain” flood insurance results in ineligibility for future disaster assistance for flood-damaged items. The purpose of this requirement is to protect taxpayers from funding future similar losses to the same property.

Notification Requirement to Subsequent Owners

There is also a duty to notify the next owner of the “obtain and maintain” requirement in writing on or before the date the property is transferred. The notification requirement applies to personal, commercial, or residential property. The notification should appear in the document transferring ownership, such as the Act of Sale, as well as the Purchase Agreement. A sample of an addendum to the “Louisiana Residential Agreement to Buy and Sell” is linked below. For this reason alone, it is proper practice for insurance and real estate agents alike to stay on top of their continuing education requirements. No professional wants to make a mistake simply by not knowing the updated facts!

The Requirement to Notify by Sellers

If the following events occur: (1) the seller fails to provide this notice and the buyer does not obtain and maintain flood insurance as required; (2) the property is damaged by a flood disaster; and (3) Federal disaster assistance is provided to repair, replace, or restore the damage, then the seller may be required to reimburse the Federal government for the amount of the assistance previously received by the seller. The failure to provide the notice could be a very costly error to the former owner of the property.