Real Estate

Flooded with red tape

Flood insurance is straightforward in concept but not in practice

A torrential downpour is a welcome sight in the midst of drought, as long as it does not result in your living room resembling a poorly planned swimming pool.

Navigating the world of flood insurance means negotiating its implications for remodeling, the increased cost of borrowing money and the reality that flooding can be financially catastrophic.

All of Palo Alto is technically a flood zone, but not all Palo Alto residents live in a Special Flood Hazard Area (SFHA). According to the National Flood Insurance Program (NFIP), a SFHA has a one-in-four chance of flooding during a 30-year mortgage. Flood insurance is only required of residents who live in an SFHA and have obtained a mortgage from a federally backed or regulated lender.

There are only two ways to get out of purchasing flood insurance, which can cost around $2,000 a year: Residents can assume the risk by paying off their mortgage, or they can get their home removed from SFHA categorization.

Crescent Park homeowner Jonathan Seder chose the former route. Seder explained that he was not in a high-risk flood-zone area -- until all of sudden he was included. Flood zones are redefined every now and then due to environmental changes and the use of increasingly accurate flood-zone evaluation tools. Since he had a loan issued by a federally insured lender, the zone change required him to obtain flood insurance.

"I personally decided that there was really minimal risk for my property. It had never flooded in history; it didn't even come close to getting flooded in the (1998 San Francisquito Creek flood)," Seder said.

To change a home's flood-risk rating, one can apply to the Federal Emergency Management Agency (FEMA) for two types of flood-insurance exemptions: Letter of Map Amendment (LOMA) and Letter of Map Revision (LOMR). A LOMA is granted when a resident is able to prove, via hiring a licensed surveyor or professional engineer, that the property is situated so that if flooded, the house would be left sitting above the water on its own island. A LOMR can be granted when work is done to raise a property's elevation.

Seder hired a surveyor in an attempt to obtain a LOMA, but the surveyor's findings did not qualify him. He eventually decided to get rid of his flood-insurance requirement by paying off his loan.

Palo Alto, Mountain View and Menlo Park all partner with the National Flood Insurance Program, which provides subsidized insurance to communities that agree to adopt and enforce FEMA-approved ordinances designed to reduce the risk of flooding. If a community follows these protocols, then its residents can obtain insurance from more than 80 private insurance companies in partnership with the NFIP. The rates are consistent nationally and determined by factors such as a home's age, type of construction and level of flooding risk.

Flood insurance is especially unwelcome if homeowners want to remodel. The main constraint is that all parts of an SFHA home, including the foundation, must be above the base flood elevation -- thus a basement cannot be added. Things get more complicated when the renovation costs 50 percent or more of the current market value of the home, which is not allowed unless the homeowner obtains a flood-insurance exemption. Without the exemption, homeowners who don't currently need insurance their mortgage is not federally insured, for example -- must also make the house flood insurance-approved. If there's an existing basement below the flood elevation, it must be filled in.

Flood insurance is a financial hindrance, unless a home is actually flooded. Only a few inches of water can cause tens of thousands of dollars in damage.

"There are some people who really are in a flood zone, whose homes have been flooded; they got flooded in '98 and maybe at other times, and that's a catastrophe," Seder warned.

He described how some people modify their houses to protect against flood damage, adding tile floors and concrete walls.

Steve Fox, an insurance agent at Allied Brokers in Palo Alto, explained that most of the people he talks to would not have flood insurance if they did not have to.

When a new flood-insurance customer comes to Fox, his first question is, does the client want flood insurance or just need it?

The second question he asks is, have they ever had an elevation certificate done? An elevation certificate determines the appropriate flood-insurance premium rate for a home. It can only be obtained by having a licensed surveyor, engineer or architect determine the accurate elevation of a home in relation to the base flood elevation. Elevation certificates can, depending on the results, prove eligibility for a LOMA or LOMR.

"If you don't have an elevation certificate everybody is paying basically the same rates, which in this area is usually between $1,600 and $2,000 (annually)," Fox said.

If a client's elevation certificate is favorable, the flood-insurance payments can decrease to a couple hundred dollars.

Fox also pointed out that flood insurance can be obtained from insurance companies not in partnership with FEMA. Lloyd's of London is an example of a private flood insurer. The advantage to private flood insurance is the ability to insure a home to its full value, while FEMA only insures up to $250,000. The catch is that companies like Lloyd's of London are not required to provide flood insurance, while FEMA has to provide it. Fox emphasized that there are no small claims with flood damage, making insurance companies likely to decline insuring properties with potential for serious flooding.

The final complicating factor is that federal flood-insurance policies keep changing, making it hard for property owners to keep track of how much they should or shouldn't be paying. Fox emphasized there is a lot of misinformation in the mix.

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3 people like this
Posted by Garden Gnome
a resident of Crescent Park
on Jun 10, 2015 at 4:38 pm

Fortunately for Mr. Seder's neighbors, the underlying cause of that 1998 flood - the backup at the Chaucer Street bridge has been rectified, so certainly those paying that average of $2000/year can safely cancel their flood insurance.

Oh, wait - 17 years have gone by and nothing has been done.

My bad!

Sorry, but further commenting on this topic has been closed.

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