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Shoring Up

Flood Insurance Inadequate levels of flood insurance expose homeowners and businesses to severe financial hardships.


Hurricane Katrina exposed a lot of weaknesses in the area's flood protection systems. The aftermath of the storm likewise exposed weaknesses in the nation's flood insurance program. Homeowners and businesses in Louisiana and Mississippi who lost everything have had to face the additional frustration of learning that they were uninsured or severely underinsured against flood losses -- often through no fault of their own. In addition, they also learned that inadequate levels of flood insurance expose them to severe financial hardships because of home mortgages or business debts that now must be paid. The result is a domino effect of widespread flood damage followed by an inability to fully restore homes and businesses, followed in turn by a regional mortgage and lending crisis.

In recent weeks, two proposals have surfaced to address these problems -- one to bring immediate relief to flood victims and the other to shore up America's flood insurance program so that homeowners and businesses will have adequate coverage in the future. The potential for immediate relief comes in a proposal by Louisiana Congressman Richard Baker, R-Baton Rouge, who has introduced a bill to create the Louisiana Recovery Corporation. A long-range solution has been proposed by the Independent Insurance Agents & Brokers of America, also known as the Big "I," which recommends a series of reforms that will raise coverage limits, set minimum coverage amounts for contents, simplify processing and claims, allow businesses to buy "business interruption" coverage for flood losses, and provide other reforms. Both ideas have a lot of merit.

Congressman Baker's idea for a Louisiana Recovery Corporation (LRC) got off to a rocky start through no fault of the congressman. Someone in the media mischaracterized the proposal as "usufruct" -- a term in Louisiana's civil code that can be as difficult to pronounce as it is to understand. Elsewhere, someone claimed -- inaccurately -- that the proposal could trigger an "eminent domain" crisis if people's property or businesses were confiscated against their will. In truth, Baker's proposal is a fiscally sound, voluntary alternative to homeowners and businesses walking away from mortgages and commercial debt in the face of massive flood losses and inadequate flood coverage. The proposal was endorsed last week by Mayor Ray Nagin, Gov. Kathleen Blanco (through the Louisiana Recovery Authority), New Orleans District A Councilman Jay Batt and other local elected officials.

"For those with mortgages, beginning about Dec. 1, the 90-day forbearance period most banks granted borrowers before requiring loan payments again will give out, creating additional financial stress," Baker says. "Those who own their property outright also confront realities that insurance and other payments will be insufficient to rebuild, as well as uncertainty over what rights they will retain should their property be condemned. All seek answers and assurance about what to do. Assisting them will require significant resources, while at present no system is in place to help."

As proposed, Baker's LRC would purchase property from willing sellers who would receive compensation for their pre-hurricane equity -- and settle the sellers' entire loan obligation, if they have one. This would give homeowners and businesses the ability to "cash out" at pre-hurricane levels without having to deal with mortgages or commercial debt. The buyouts would take insurance payments, if any, into account so that no one gets a windfall. The LRC then would pay to recondition land, provide infrastructure improvements necessary for redevelopment, and facilitate rebuilding entire communities by contracts granted through a competitive bidding process. Its goal would be to acquire, through voluntary sales, large tracts of land suitable for redevelopment. Master plans would be developed by state and local officials with residents' input, not by the LRC. Moreover, sellers could get special options, or "right of first refusal" to repurchase in their neighborhoods after redevelopment. Above all, no one would be forced to sell property. The program would be strictly voluntary.

Looking ahead, the Big "I" has suggested 22 specific changes in the National Flood Insurance Program (NFIP). Some of the suggested reforms are designed to reduce insurers' risks, while others are intended to give homeowners and businesses better coverage options. The NFIP is a large and complicated program, and we won't pretend to understand all its nuances. But we do think the Big "I" proposal is a good starting point for any discussion of needed reforms. In particular, we like the following ideas:

• Increase the maximum coverage limits above the current $250,000 for residences and $500,000 for commercial buildings so that they reflect modern real estate prices -- and provide for periodic adjustments to track inflation.

• Provide for automatic, minimum amounts of "contents" coverage for all building policies, with additional contents coverage available for additional premiums.

• Provide for automatic, minimum coverage levels for additional living expenses on all residential policies, with an option to buy higher coverage levels.

• Add optional business interruption coverage on all commercial flood policies.

Baker's proposal and the Big "I" suggestions address problems faced by thousands of Louisiana home and business owners in the wake of Hurricanes Katrina and Rita. We urge Congress to give both proposals immediate and serious consideration.

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