What if federal-flood insurance, with an opt-out provision, wasautomatically added to standard homeowners and commercial-propertypolicies—at least for those in high-risk zones? PC360 readersresponding to my Jan. 30 blog about this notion were of two minds—most who tookthe time to write loved the idea, but many cited potentialpitfalls.

In my prior blog, I emphasized that under my plan floodcoverage would remain voluntary—policyholders could choose toopt-out at the time of purchase, or when it is time to pay theirbill. However, I suggested that including it automatically wouldalert policyholders in no uncertain terms that by refusing theoptional coverage, their home or business could be exposed tosubstantial out-of-pocket losses if a flood or storm surge shouldhit.

As potential upsides, I posited that perhaps more people mightactually buy flood insurance. And even if they chose not to, atleast they couldn't credibly claim their agent or carrier hadfailed to inform them that flood was not part of standard coverage,and that a National Flood Insurance Program (NFIP) policy wasavailable to account for that risk. I speculated that perhaps sucha step could help agents sell more flood insurance while lesseningthe potential for errors and omissions suits.

I asked for reader feedback, and received about two-dozene-mails in response. The readers whose observations I cite belowagreed to allow me to quote from their written comments, as long asI identified them only by their role in the industry and, in somecases, their general location.

"I read your article and agree with you," said oneresidual-market executive. "Your idea would also improve thefinancial condition of the NFIP by increasing the number ofpolicyholders. As it is, flood insurance is a textbook example ofadverse selection. The only folks who buy it now are those who knowthey'll someday have a loss."

An adjuster said he thought I had a "great idea" which, ifimplemented, might mean that "Congress would not have to approve abailout package every time one of these 'superstorms' occur."

A county government risk manager wrote that "the time has comefor a process like you have described. It seems like our countrystill does not get it—we want taxes lowered, but when people takeknown risks and incur loss, they ask where is the federalgovernment to bail them out?  This happens manytimes—again and again!"

The county risk manager added that "free lunches just don'texist. If you want to live in a beautiful part of the country (mostof the time), which happens to have high risk, then the likelihoodof disaster must be factored into the equation by creditors,insurers and the insured. The view from the top of the dormantvolcano is great—however…."

An insurance company executive also seconded my motion, notingthat "we already have precedent in many states where we have toprovide Uninsured/Underinsured Motorist coverage for autoinsurance, with opt-out forms." 

However, an agent from Maine—while hailing my suggestion as "arevolutionary idea"—observed that "some careful thought would haveto go into crafting the actual language, as mortgage requirementsalready in place would/should void the option toopt-out." 

This New England producer said my proposal raised many "plusesand minuses from an agent standpoint. But overall we are here toeducate and should be ready to explain the consequences of havingno flood coverage…Our industry could start a campaign to educatethe public prior to the next happening!"

He also suggested adding teeth to my proposal by passing "somelegislation to preclude those who have opted-out from collectingstate and federal assistance following a flood loss."

One independent agent said that while he agrees with my idea "inprinciple," he cited "the challenge of dealing with the complicatedunderwriting process of a standard flood-insurance policy that thefederal government issues."

"As an agency we advise clients when we give them a quotationfor property to consider flood coverage—that way, if the clientdesires a quote, we gather the additional underwritinginformation," noted this independent agent. "Your information mustbe 100 percent accurate before you offer your client a quotation.Any mistakes can jeopardize the limits and premium."

He added that "with the documentation requirements of post-FIRMconstruction, the government does not make it easy," referring tothe upgrades demanded of structures completed or substantiallyimproved after a community's initial Flood Insurance Rate Map isissued.

Others were skeptical whether my idea would alleviate an agent'sE&O exposure, or merely exacerbate it by opening up another canof worms. 

Indeed, one bank agent wondered whether "with a limitless numberof coverages and exclusions in personal and commercial insurancepolicies, would an agent be mandated to explain or have signedacknowledgments for every exclusion?" 

He warned that my idea might end up setting "a precedent thatprovides a basis for a lawsuit when other future claims are notcovered, and signed exclusions are not required." He also doubtedwhether my suggestion would increase sales of flood insurance,adding ruefully that "clients only want a coverage after anuninsured loss."

An agent from Hawaii was also doubtful, lamenting that while"automatically adding flood coverage…seems like the right thing todo, especially after Superstorm Sandy, it would just bring anotherexposure to an agent's E&O."

This agent cited potential problems with the limits of floodcoverage offered by the federal program, since "under the NFIP, Ican secure only $250,000 on the dwelling and $100,000 on contents,with no coverage for loss of use." If a policyholder's dwelling isvalued at more than $250,000, the agent noted that the clientshould at least be advised to consider excess flood coverage—a veryexpensive and perhaps unaffordable option for manyhomeowners. 

Meanwhile, he warned, "if we fail to 'convince' these insuredsto buy excess flood coverage, we still can be sued for failure tosecure the needed coverage, especially when the homeowners sectionhas adequate coverage for other perils." (Unless they seek anopt-out acknowledgment for that declination as well, I wouldsuggest.)

While my idea might "make sense on paper," the Hawaiian agentargued that "flood coverage and hurricane coverage should bewritten separately from the homeowners [policy] and left for theindividuals to decide to purchase or decline it. The buying publicshould be held accountable rather than laying all blame at theagent's or carrier's feet."

The Aloha State agent concluded that "all of our carriers put awarning on the homeowners' policy declaration page, indicating thathurricane and flood coverage is not included, and to call theiragent if they are interested in securing this coverage. Caveatemptor! [Let the buyer beware!]"

A second insurance-company executive said that while my blog was"a good read and offers a good idea, it may run into challengessimilar to the current brouhaha over the Patient Protection andAffordable Care Act," which mandates most individuals to certifythey have health insurance. "I think you may see that while yoursuggestion seems practical it may be labeled as just another partof 'The Nanny State,' and politics will kick it to the curb," heexecutive said.

Last but not least, a third insurance-company executive saidwhile my proposal is "not a bad idea," he offered an alternative,urging the insurance industry to get more actively involved inschool curriculums.

"There should be formal classes (perhaps given by volunteerinsurance industry professionals) in schools to educate studentsabout the various types of policies and the coverages theyinclude/exclude," this carrier official suggested. "The benefitsfor doing this are many.  They include educatingthe up-and-coming generation about insurance, possibly attractingyounger people to consider careers in the industry, and helpingchange the public's perception that the industry is out to gougethe public.  I can't think of many downsides to thisplan."

Neither can I. While some individual insurers and independentagents already perform such educational outreach, 'Insurance 101'classes are hardly standard for most school systems. The question Ihave is whether students will pay attention in class and learn thebasics of insurance when a number of studies indicate that despitetheir teachers' best efforts, many don't seem to grasp the basicsabout our own system of government!

Taking a cue from our agent reader in Hawaii, I say,'Mahalo'—thank you—for responding in such numbers and such depth tomy suggestion. If anyone else wants to contribute to this debate,you can comment below this blog, or e-mail me directly at [email protected].