The Independent Insurance Agents & Brokers of America (IIABA) welcomed the United States House of Representatives’ passage of legislation that will extend the National Flood Insurance Program (NFIP) for five years. The bill now moves to the Senate, which, at press time, is gridlocked.

The Flood Insurance Program plays a quiet but vital role in the fostering of economic growth. Every day, approximately 1,200 home sales are closed, contingent upon the existence of required flood insurance, according to the National Association of Mutual Insurance Companies. More than 5 million American homes and businesses spread the risk of flood losses through the program.

“Reauthorizing and improving the Flood Insurance Program helps home owners, businesses and communities throughout the country,” said the bill’s prime sponsor, Congresswoman Maxine Waters (D-Cal.). “This legislation restores stability to NFIP which it lacked while subject to lapses and only temporary extensions. During lapses in the Flood Insurance Program over the past year, FEMA was not able to write new policies, renew expiring ones or increase coverage limits.”

The history of the National Flood Insurance Program is traced at least as far back as the Great Flood of 1927, which inundated vast swaths of the Mississippi, Ohio and Missouri River Basins. The Red Cross, in cooperation with then U.S. Secretary of Commerce Herbert Hoover, provided most of the emergency response to this disaster. The massive economic losses associated with that flood made clear that the scope and severity of flood losses was beyond the capacity of private sector insurers but was not an economic risk that the nation could ignore.

The intervening crises of The Great Depression and World War II delayed consideration of a federal program to spread the risk of flood losses.

In 1955, within a five-day period, Hurricanes Connie and Diane dumped heavy rain across New Jersey and New England, which triggered widespread and severe flooding. Most of the region’s congressional delegation, including a young junior senator from Massachusetts named John F. Kennedy, proposed the creation of a federal flood insurance program. However, the bill was killed in the Senate through the opposition of Connecticut Senator Prescott Bush (the father and grandfather of the future presidents).

The proposal languished in Congress until Hurricane Betsy hit the Gulf Coast and New Orleans in 1965. The Category 3 storm crossed Florida and entered the Gulf of Mexico. While swirling in the Gulf, the storm swept away eight offshore oil platforms, including an oil rig called “Maverick,” which was owned by Zapata Corporation (founded by George Herbert Walker Bush and other business partners) and insured by Lloyd’s of London.

Betsy made landfall near the mouth of the Mississippi River as a Category 4 on September 9, 1965. The storm surge caused several breaches in the levies built to protect Chalmette and several neighborhoods of New Orleans, including the Upper and Lower Ninth Ward. At the urging of Senator Russell Long that it would be good for New Orleans (and for the president), President Lyndon B. Johnson was in The Big Easy the very next day, pledging federal support.

The Johnson administration then added the flood insurance proposal to its legislative agenda, and the legislation passed in 1968. The program created an insurance pool funded through premiums paid by policyholders. If a surge of claims exceeds the pool’s capacity, the program may borrow funds from the United States Treasury, which is repaid with interest. The program also establishes a uniform mapping program, in addition to a risk mitigation department that operates in cooperation with the Federal Emergency Management Agency (FEMA).

For the first 30 years of its existence, the program worked efficiently, although, after the Great Missouri Flood of 1993, critics charged that the Flood Insurance Program too often provided payments to claimants who also received disaster-relief benefits. In addition, some environmental activists criticized the program for encouraging construction in areas that they argued should remain undeveloped.

In the last decade, the program has faced political trouble in Congress. A reauthorization bill passed in 2004, which included amendments that sought to correct the double-dipping problem and encourage property owners to move out of flood-prone areas after one claim. Until recently, and especially when former Congressman Michael Oxley chaired the House Financial Services Committee, Congress has proved unwilling to pass a long-term extension to the program.

Congresswoman Waters and House Financial Services Chairman Barney Frank (D-Mass.) made reauthorization of the program a legislative priority in this Congress. Consideration of health care reform and financial services reform legislation delayed the progress of the reauthorization bill.

In addition to providing a five-year reauthorization, H.R. 5114 makes additional improvements to the Flood Insurance Program by phasing in actuarial rates for pre-FIRM properties—those built before the effective date of the first Flood Insurance Rate Map (FIRM) for a community. It also raises maximum coverage limits, provides notice to renters about contents insurance and establishes a Flood Insurance Advocate, similar to the Taxpayer Advocate at the Internal Revenue Service.

Organizations such as the National Association of Realtors™, the National Association of Home Builders, the American Insurance Association (AIA), the Property Casualty Insurers Association of America (PCI), and the Independent Insurance Agents & Brokers of America support the legislation.

“The recent series of expirations and temporary extensions is nega­tively impacting the market,” says Robert Rusbuldt, Big “I” president and CEO. “The Big ‘I’ commends the House for passing this bill which is a step in the right direction to a long-term extension of the NFIP and includes much-needed reforms to the critical program.”

“Unfortunately, recent years have provided ample evidence of the destruction left behind by floods that highlights the urgency and importance of both extending and updating the NFIP,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs. “The Big ‘I’ strongly believes that the NFIP needs a long-term extension to bring stability to the marketplace. Additionally, home owners and businesses deserve the ability to purchase business interruption insurance and additional living expenses coverage in order to properly insure their property. We hope the Senate will soon follow suit and pass H.R. 5114.”

From the perspective of carriers, the AIA offered its support to H.R. 5114:

“A long-term reauthorization of the NFIP is of great importance,” said Leigh Ann Pusey, president and CEO of AIA. “The recent lapses in the NFIP due to the use of short-term extensions have caused disruptions to home owners, businesses and hindered real estate closings nationwide. A long-term NFIP reauthorization will bring much-needed stability to the market.”

The support of the AIA could have eroded had the house amended H.R. 5114 as proposed by Representa­tive Gene Taylor (D-Miss.), who wants to amend the flood program to cover wind damage. Representative Taylor is a member of the Blue Dog Coalition, a group of conservative Democrats.

Representative Taylor’s Web site offers the following summary of his proposal:

“The Multiple Peril Insurance Act would allow coastal home owners to buy comprehensive insurance and know that hurricane damage will be covered without lengthy legal disputes over how much damage was caused by wind and how much was caused by flooding.

“After Hurricane Katrina, insurance companies overbilled taxpayers and underpaid home owners by blaming flooding for some damage that had been caused by hurricane winds and wind-driven debris.”

In order to preserve support for the overall NFIP reauthorization bill, both the Democratic House leadership and the Obama administration opposed the Taylor Amendment, which is filed under the bill number H.R. 1264.

The Property Casualty Insurers Association of America (PCI) blasted the Taylor Amendment in a statement released to the news media on July 28:

“This proposed legislation is unnecessary and fraught with negative consequences that will harm consumers and the marketplace at a fragile time for our American economy,” said David Sampson, president and CEO of PCI. “This approach is a mistake that could deliver devastating results to the U.S. job market and add billions to the federal deficit.”

The PCI offered a scathing analysis of the bill:

—PCI estimates that up to 41,775 private sector jobs could be lost or moved to Washington, D.C. This is the equivalent of $2.6 billion in lost wages that would be removed from the economy or shifted from local communities to federal government jobs.

—State and federal governments could lose approximately $22.1 billion in premium taxes, income taxes and municipal bond investments from private insurance companies.

—The National Flood Insurance Program is already struggling with $18.2 billion of debt (without windstorm coverage), which is a significant burden on the program. The interest alone on this debt costs the NFIP more than $900 million a year, none of which goes to pay back any of the principal.

—The Federal Emergency Manage­ment Agency (FEMA) does not support adding windstorm coverage to the NFIP, citing concerns that this would threaten the long-term viability of the program. U.S. Secretary of Homeland Security Janet Napolitano has also expressed opposition to the multi-peril proposal.

—In late July 2010, the Office of Management and Budget released its official Statement of Administra­tion Policy opposing the Multiple Peril Insurance Act, as it would unnecessarily expand the federal government’s role in the windstorm insurance market.

—Environmental groups have expressed major concerns that this legislation would create incentives for more development in environmentally sensitive coastal areas, leading to increased damage to wildlife habitat, wetlands and coastlines.

—In a July 20, 2010, letter to the U.S. House of Representatives, groups including the Environmental Defense Fund, National Wildlife Federation and Sierra Club all urged lawmakers to reject this proposal to add wind­storm coverage to the NFIP.

—The Consumer Federation of America opposes the Multiple Peril Insurance Act as it would hurt consumers by forcing greater taxpayer subsidies and providing developers with more incentives to build unsafe structures.

—Taxpayer advocate groups, such as Americans for Prosperity and Americans for Tax Reform, continue to sound the alarm by pointing to the billions of taxpayer dollars needed to add windstorm coverage to the NFIP.

—The U.S. Chamber of Commerce also opposes H.R. 1264, stating that the proposal threatens the jobs market and the availability of windstorm insurance coverage in the private market.

The current temporary reauthorization of the NFIP expires on September 30. It is unclear if Senate leaders will be able to achieve an agreement to produce a super-majority to end debate in the Senate. In the House, Republican leaders attempted to recommit HR 5114, even without the Taylor amendment.

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.