South Carolina Sea Grant Consortium
287 Meeting Street, Charleston, SC 29401
phone: 843.727.2078 — fax: 843.727.2080

Not long ago, FEMA's chief proposed that some aspects of the flood-insurance program should be reformed, but property owners responded with such fury that the idea was quickly dropped.

The FEMA director was attempting to focus attention on a widespread problem. That is, many repeatedly flooded homes can be rebuilt again and again in the same vulnerable places, while the property owners continue taking insurance checks and receiving public assistance. If a flood damages a private residence by more than 50 percent based on its pre-disaster market value, the owner is required to raise, demolish, or relocate it, according to federal rules. But if each flood damages less than half of a home's market value, the owner can keep taking insurance payouts.

Let's say you own a 40-year-old, $80,000 single-family home, federally insured for floods that have swamped the building five times. In the Midwest, the average payout after floods in the early 1990s was $25,000. So let's say that on your $80,000 house you have received $25,000 in damage claims for five separate floods—$125,000 total. Yet because your claims have never triggered the 50 percent rule, you're under no obligation to demolish or upgrade your home to current standards.

Thus current insurance rules act as a perverse incentive, allowing repeated settlements on buildings that should be moved or flood-proofed. Such “repetitive-loss structures" are a drain on the flood insurance program. Nationwide, 35,000 properties have been flooded at least twice in the past decade, costing the program over $200 million a year. The flood insurance program had to borrow $810 million from the U.S. Treasury between August 1995 and January 1998.

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Local governments enforce the 50 percent rule through their building permit procedures, but many homeowners don't apply for permits before making repairs, and inspectors don»t have time to check every structure. “The majority of repair work is done without permits," says Johnson. “When you have 60 percent of the homes in a town damaged by a hurricane and one inspector, you can't keep up. People are doing repairs at night and weekends without a permit. You don't know what's done." This is a common problem nationwide as local governments, underfinanced and understaffed, are hard-pressed to inspect all the rebuilding after a natural disaster. Many property owners also know how to manipulate the system, said Terri Potts, zoning administrator with the city of North Topsail Beach, North Carolina. “They can get almost any figure from contractors on estimates of repair." Some homeowners get estimates well below 50 percent of the structure's value, receive a permit to rebuild, and later secretly renegotiate the real cost of construction with the contractor.

If a house's damage is greater than 50 percent of the structure's actual value, many local officials ignore the evidence. “You don't want to tell somebody 70 years old, somebody who got their home from their dad, that they can't rebuild," said Johnson.

James Lee Witt, director of FEMA, proposed in a November 1998 speech that the agency should reform its system of insuring repeatedly damaged properties. He argued that flood insurance should not be available to homeowners with at least two repetitive losses totaling more than the value of their property, and who refuse to elevate their home or accept a buyout. “People need to accept the responsibility and consequence of their choice to live in high-risk areas," said Witt.

This seems a sensible proposal. Yet it is very far from becoming national policy, said Todd Davison of FEMA. “There was a tremendous recoil and backlash" from property owners after Witt floated the idea, he said.

Perhaps the public reaction is another example of Americans believing that they should garner all possible benefits from a government program while they refuse to accept reasonable obligations in return.