If Hurricane Katrina — not to mention the eight other hurricanesthat hit Florida and other parts of the country in 2004 and 2005 —showed America just how vulnerable and ill-prepared it was, itequally exposed the country's blind eye to the devastating effectsof flood damage. At a recent exhibit in New York's Museum of ModernArt, a collection of photos taken in New Orleans's Lower Ninth Wardexposed just how ravaging a rising tide of water can be. Thepictures showed house after house with layers of mud caked on thefloor, sagging covers of waterlogged furniture, warped anddisfigured pictures, and that brown line along the walls thatmarked just how high the water reached. For all visual purposes, itmight as well have been a war zone.

It was only after the storms that many homeowners discoveredthat their homeowners' insurance policies didn't cover flooddamage. Those with the money to retain high-priced lawyers foundout the hard way that suing private insurers for losses due toflood was an exercise in futility. After all, the only entityselling flood insurance is the federal government, andparticipation in the National Flood Insurance Program is strictlyvoluntary. This fact is the Achilles' heel of the entire financialstructure put in place to protect policyholders from damage due tohurricanes and any associated flood damage.

Given Katrina, and the numerous other storms that have causedmillions of dollars in losses due to storm surge and rising water,a question of whether there should be a state or federal mandatecalling for homeowners in flood zones to purchase flood coveragehas been raised.

Mandate or Option?

It's ironic that while Congress continues to resist creating anational hurricane catastrophic financial safety net, it decideddecades ago to take on the responsibility for covering losses dueto flood damage.

Congress created the National Flood Insurance Program in 1968 asthe government's response to the rising need for taxpayer-fundeddisaster relief due to the increased amount of damage caused byflooding. Operated by the Federal Emergency Management Agency, thegovernment-backed coverage provides homeowners with up to $250,000in coverage to repair their homes. The insurance program alsoprovides up to $100,000 in contents coverage. The insurance wasdesigned to complement the windstorm coverage offered by privatecarriers or state-run markets such as Citizens Property InsuranceCorporation.

Since 1978, the federal flood insurance program has paid outmore than $30 billion in claims. Over the past decade (1996-2005),the country's average annual flood losses have exceeded more than$2.4 billion (that's before taking into account the full amount oflosses caused by Katrina). In 2005, the National Flood InsuranceProgram paid nearly $16 billion in flood claims, and up to 25percent of that went to owners of flood-damaged property locatedoutside of designated “flood prone” areas. FEMA calculates thatevery three dollars paid in flood insurance claims saves one dollarin disaster assistance payments.

Given the cost-benefit ratio of the flood insurance program, itwould seem a no-brainer to mandate coverage in flood-prone areas.In Florida, one need not look further than the repeated damage dueto storm surge along the Panhandle region to make a cogent argumentin support of mandating flood coverage.

However, currently the only homeowners required to carry thecoverage are those forced to by banks and other lenders who requirehomeowners in flood-zone areas to purchase the coverage in order tobe eligible for a mortgage. By law, homeowners in flood-prone areas— such as along the coast — need to get flood coverage if they geta mortgage from a federally regulated lender. But even that mandatehas holes, as witnessed in the aftermath of Katrina when manydamaged homes were not covered by flood insurance.

Banks are required to enforce the rules and after Katrina, manycritics blamed banks for their sometimes-lax enforcement of theflood-insurance requirement, which resulted in homeowners findingthemselves without the needed coverage to repair their homes.

The Federal Deposit Insurance Corp., which regulates lenders,fined banks $297,815 last year for flood-insurance violations, an82 percent increase from 2005. Then there is the case of homeownersbuying flood coverage to secure a mortgage, only to turn arounddrop the policy later. “Lenders do a good job of finding outwhether someone is in a flood plain, but they don't do as good of ajob of tracking the coverage if you lose it,” said J. RobertHunter, director of insurance at the Consumer Federation ofAmerica.

But while lenders and regulators have made progress over theyears in requiring homeowners to buy policies, most say more mustbe done to get homes covered in flood zones. Despite efforts by thegovernment, insurers, agents, and lenders to prod homeowners intobuying flood policies, too many don't feel compelled to do so. Andcurrently, beyond banking requirements, there are no legal toolsfor either the federal or state governments to require those livingin flood zones to purchase coverage.

Insurance Information Institute President Dr. Robert Hartwigsaid that it is time for the federal government to step forward andchange this. He said every hurricane season, the same lesson islearned: without flood coverage, there is a significant hole in thefinancial needs to rebuilding after a storm. “We've tried thecarrots for a long time,” he said. “It's time to try thestick.”

From Hartwig's point of view, if the government can mandateautomobile drivers to buy auto insurance and companies to carryworkers' compensation insurance, it can also require homeownersliving in flood zones to buy flood coverage. How to accomplish thisis easy, he says. If a homeowner living in a flood zone refuses topurchase coverage, they must sign a waiver that makes themineligible for federal disaster aid in the event of a majorstorm.

Until that becomes law, Hartwig said, the minority of people inflood zones will have flood coverage and those without coveragewill have their expenses paid for by the rest of the taxpayers inthe form of federal disaster aid payments. “People say, 'I don'tbuy flood insurance because floods are such an extremely rareevent.' They don't understand that's the whole purpose of havinginsurance,” he said.

Florida's Experience

Citizens Property Insurance Corporation formerly required allpolicyholders located in flood zones to purchase thefederally-backed flood insurance. However, the legislature laterlifted the mandate in a political move to help show taxpayers thatthey were trying to reduce insurance costs. Then it appeared thatmaybe private insurers were indeed on the hook for losses due toflood.

In Mierzwa v. Florida Windstorm Underwriting Association (877So. 2d 744), a homeowner sustained both wind and flood damage butwas only covered by a wind policy issued by FWUA. Under a localordinance, the house was deemed a total loss. The homeowner thensued FWUA, saying that the company should be responsible for payingthe full face value of the policy, which effectively ended theinsurer's ability to apportion the damages. The Fourth Districtinterpreted the state's value policy law so that in the insurerswere on the hook regardless of the specific perils and uncovereditems listed in the policy.

A recent Florida Supreme Court ruling reversed Mierzwa bystating that the state's value policy law only covered damagesunder a policy, regardless of the total damages sustained by ahomeowner. Specifically, the court's ruling codified that privateinsurers issuing wind-only policies in coastal areas areresponsible for damages due to wind and not flood damages caused bystorm surge or flooding. As stated by the court, “The intent ofthis subsection is not to deprive an insurer of any proper defenseunder the policy, to create new or additional coverage under thepolicy, or to require an insurer to pay for a loss caused by aperil other than the covered peril.” Further the law goes on theread, “When a loss was caused in part by a covered policy and inpart by an uncovered peril, the insurer's liability under thissection shall be limited to the amount of the loss by the coveredperil.”

Citizens spokesman Rocky Scott said the company would like itspolicyholders to have flood coverage, but the recent court rulingmade the issue moot because the insurer is no longer on the hookfor any flood costs. The company does ask policyholders to sign awaiver if they chose to not have flood coverage while living in aflood zone. But given the court's findings, Scott acknowledged,“Today, it doesn't affect us one way or the other if they have aflood policy or not.”

The Florida Insurance Council doesn't have a position on theissue, but spokesman Sam Miller said such a requirement could helptake the pressure off property insurers. Miller notes that nearly40 percent of five million people holding federal flood policiesare in Florida. But it should be noted that the state has morecoastline than any other. “We do a fairly good job of encouragingcustomers to buy it,” he said. “But people don't want to buy flooddue to the cost of the premiums.”

“Everyone ought to have flood insurance, if they live in a floodzone or not,” said Scott Johnson, executive vice president of theFlorida Association of Insurance Agents. “But knowing they shouldhave it is not enough for many people to buy it.”

Johnson bought a flood policy for the first time himself thisyear for his home in Tallahassee. He said the hurricanes of thepast few years influenced his decision, along with adding a newpatio in his backyard. He said the $300 he spent gives him peace ofmind should a freak storm hit. Johnson said property owners arewrong to skimp on flood coverage, thinking they are saving money bynot buying a policy. “It's like going to sleep in the park to saveon rent,” he said.