New York and New Jersey residents, just coming to grips with the enormous costs of repairing homes damaged or destroyed by Hurricane Sandy, will soon face another financial blow: soaring flood insurance rates and heightened standards for rebuilding that threaten to make seaside living, once and for all, a luxury only the wealthy can afford.
Homeowners in storm-damaged coastal areas who had flood insurance — and many more who did not but will now be required to — will face premium increases of as much as 20 or 25 percent per year beginning in January, under legislation enacted in July to shore up the debt-ridden National Flood Insurance Program. The yearly increases will add hundreds, even thousands, of dollars to homeowners’ annual bills.
The higher premiums, coupled with expensive requirements for homes being rebuilt within newly mapped flood hazard zones, which will take into account the storm’s vast reach, pose a serious threat to middle-class and lower-income enclaves in Queens and on Staten Island, Long Island and the Jersey Shore, where families have clung fast to a modest coastal lifestyle, often passing bungalows or small Victorian homes down through generations, even as development turned other places into playgrounds for the well-to-do.
While many homeowners are beginning to rebuild without any thought to future costs, the changes could propel a demographic shift along the Northeast coast, even in places spared by the storm, according to federal officials, insurance industry executives and regional development experts. Ronald Schiffman, a former member of the New York City Planning Commission, said that, barring intervention by Congress or the states, there would be “a massive displacement of low-income families from their historic communities."
After weeks of tearing debris from her 87-year-old, two-story house on the bay side of Long Beach, N.Y., Barbara Carman, 59, said she understood the need to stabilize the flood insurance program, but she compared coming premium increases to “kicking people while they’re down."
Carman and her husband, who had hoped to retire in a few years, were reconsidering whether they could afford to remain on the coast on fixed incomes. But she feared, she said, that even selling their home could be hard.
“Only wealthy people could afford it, I guess, not middle-class people," she said. “You’re going to price us out of here."
The heightened financial pressure has emerged as an unintended consequence of efforts to stop the government subsidization of risk that has encouraged so many to build and rebuild along coasts increasingly vulnerable to extreme weather. Supporters of the effort acknowledged that it would squeeze lower-income residents but said it was vital for the insurance program to reflect how risky it is to live along the shore.
“The irony is, if we allowed market forces to dictate at the coast, a lot of the development in the wrong places would never have gotten built," said Jeffrey Tittel, director of the Sierra Club’s chapter in New Jersey. “But we didn’t. We subsidized that development with low insurance rates for decades. And we can’t afford to keep doing that. Should a person who lives in an apartment in Newark pay for someone’s beach house?"
Because private insurers rarely provide flood insurance, the program has been run by the federal government, which kept rates artificially low under pressure from the real estate industry and other groups. Flood insurance in higher-risk areas typically costs $1,100 to $3,000 a year, for coverage capped at $250,000; the contents of a home could be insured up to $100,000 for an additional $500 or so a year, said Steve Harty, president of National Flood Services, a large claims-processing company.
Premiums will double for new policyholders and many old ones within three or four years under the new law.
Across the board, rates will begin rising an average of 20 percent after Jan. 1, according to the Federal Emergency Management Agency; rate increases had previously been capped at 10 percent. For properties older than the flood insurance program, where premiums cost half as much as for newer buildings, those discounts are being phased out, through yearly rate increases of 25 percent.
Second homes and businesses will see these increases next year without exception. Primary homes will lose their discounted rates if repairs cost more than half the value of the home, if the home has had recurring flood damage or if the owner refuses an offer of money to help elevate or relocate the building — the exact situations being confronted by many homeowners affected by Hurricane Sandy. The discounted rates disappear if owners sell, let their policies lapse or make major improvements.
The stiffened penalties, higher premiums and elimination of subsidies enacted in July were meant to bolster the finances of the flood insurance program; it fell $18 billion into debt after Hurricane Katrina and had just $3 billion of borrowing capacity left before Hurricane Sandy, which could trigger claims of $6 billion to $12 billion. Congress was prodded into action not just by fiscal conservatives but by environmental advocates who believed the program encouraged reckless development in harm’s way.
But the law did not address affordability, except to say that FEMA should study it.
“You have to move toward fiscal soundness," said J. Robert Hunter, a federal insurance administrator during the Ford and Carter administrations who is now insurance director for the Consumer Federation of America. “But we’ve said you also have to some protection for low-income people. But they’ve never done it."