Sandy has laid bare the interplay between an insurance policy and a public policy. Flood Insurance is underwritten by the Federal Government. It is not the only Federal program triggered by Floods. There are other Federal programs, and there are private efforts to handle the risk of Floods as well. This is the first in a continuing series of articles on the public policy behind efforts to combat catastrophic Flood damages, the subject being too great to examine in a single article. Some will be posted here, and some will be published on Insurance Claims and Issues Blog, in a continuing daily series until we reach the end of the policy issues exposed by Sandy's winds and floods.
FEDERAL FLOOD INSURANCE.
As noted, Flood Insurance is underwritten by the Federal Government. This means that Flood Insurance Premiums and Claims Payments are given price supports by Federal Taxpayers. The Federal Flood Insurance program has been deliberately constructed to allow property owners in flood-prone areas to do two things which they could not otherwise do:
1. Obtain Flood Insurance, and
2. Pay lower Premiums to insure against the risk of Flood damage than they would otherwise pay if they could even find Flood Insurance for their flood-prone properties.
In general terms, typical Premiums charged under the Flood Insurance Program to property owners in flood-prone areas, reportedly range between $1,100.00 to $3,000.00 per year for the structure, and an additional $500.00 or so per year for contents coverage. These Premiums will buy $250,000 limits of coverage for flood damage to the structure, and $100,000 limits of coverage for such damage to the contents. See David M. Halbfinger, "Post-Storm Cost May Force Many From Coast Life / Woes for Nonwealthy / Flood Insurance Rates to Go Up as Rebuilding Becomes Stricter" p. A1, col. 1 (New York Times Nat'l ed., Thursday, November 29, 2012).
The Federal Government is not displacing private enterprise with the Federal Flood Insurance Program. As a general rule, private Insurance Companies will not offer Flood Insurance for which they are on the risk. The risk of flood damage is too great for them in the ordinary case. Halbfinger, New York Times Nov. 29, 2012, supra.
Instead, private insurance Companies contract with the Federal Government to "front" Flood Insurance Policies for which the Federal Taxpayers, not they, are on the risk. For doing this, they collect a percentage of the Premium. As a part of their arrangement with the Federal Government, the private Insurance Companies which front Flood Policies also get paid to service Flood Insurance Claims.
Next: The Public Policy behind every Flood Insurance Policy.
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