Flooding ranks as the most catastrophic and costly natural disaster in the United States. Eastern Kentucky still suffers the ongoing devastation following the historic flood last summer that claimed 45 lives and caused an estimated $950 million of residential damage in eastern Kentucky alone. As Kentuckians continue down the long road to recovery, some are doing so without the protections they should have had under the National Flood Insurance Program (NFIP) and are now facing additional challenges in the form of changes coming to the program.
History of the NFIP and the Mandatory Purchase Requirement
Congress authorized the NFIP through the National Flood Insurance Act of 1968 (42 U.S.C. §4001) to tackle extensive flood losses and soaring costs of disaster relief. The goal was to reduce flood damages through floodplain management and to protect property owners through a federal insurance mechanism.
The 1968 Act made federally backed flood insurance available to homes in flood risk areas and required flood insurance for the acquisition or construction of properties in Special Flood Hazard Areas (SFHAs). SFHAs are areas within a floodplain that with a one percent or greater chance of a flood occurring in any given year. The 1968 Act fell short of its goals as the purchase of flood insurance was not widely adopted and expensive disaster assistance payouts continued. This led Congress to create the mandatory purchase requirement in the Flood Disaster Protection Act of 1973. The mandatory purchase requirement required federally regulated or backed lending institutions to ensure flood insurance coverage was present for the life of any loan secured by real property located in an SFHA.
After the Great Flood of 1993, an estimate of roughly two million of the ten million households then identified in SFHAs had flood insurance. The continued low penetration rate for flood insurance gave rise to Congress enacting The National Flood Insurance Reform Act of 1994, which strengthened the mandatory purchase requirement for lenders and servicers to force coverage on behalf of the borrower when flood insurance does not cover at least the outstanding principal for the loan.
The mandatory purchase requirement aims to meet the same goals of the NFIP as a whole by requiring federally backed or regulated lenders and servicers for properties in SFHAs to:
1) Provide written notification to prospective borrowers for properties in an SFHA of the flood hazard and the requirements for flood insurance coverage,
2) Require borrowers to purchase and maintain flood insurance,
3) Purchase flood insurance on the borrower’s behalf if the property is not protected by the minimum amount of flood insurance,
4) Not originate loans without flood insurance.
Insurance Coverage for The Eastern Kentucky Flood Flood insurance coverage from the NFIP is the best way for disaster survivors to recover more fully and quickly. Unfortunately, flood insurance has not been widely adopted in Kentucky. Out of the 1,261,103 residential structures in Kentucky, only 14,737 or 1.17 percent had flood insurance as of June 16, 2022, according to FEMA who administers the NFIP. Approximately 9,000 homes were damaged by the flood last summer according to FEMA’s inspections following the flood. Out of those estimated 9,000 homes, only five percent had flood insurance resulting in 461 claims totaling $24.6 million.
Institutional Compliance
Despite the statutory requirements, institutional compliance with the mandatory purchase requirement is still lacking. The FDIC identified 1,974 violations of the mandatory purchase requirement during 4,929 examinations of lenders it oversaw between 2016 and 2019.
Similarly, the FDIC, Federal Reserve, and OCC identified at least one violation of the mandatory purchase requirement in 23 percent, 16 percent, and 13 percent of examinations, respectively.
Virtually all the violations identified in these examinations resulted in the borrower not having the required flood insurance coverage.
This begs the question: how many victims of the eastern Kentucky flood should have but did not have flood insurance under the mandatory purchase requirement?
The exact number remains unknown but it’s safe to say the number is higher than it should be.
By just applying the high and low percentage of examinations with violations of the mandatory purchase requirement from the FDIC and OCC, one can assume approximately 13 percent to 23 percent of the homeowners who should have had flood coverage under the requirement did not.
Comparing the projected number of claims with the actual number of claims is even worse. Of the 13 eastern Kentucky counties declared a disaster by FEMA, 46 percent of homeowners have a mortgage. Assuming 46 percent of the 9,000 damaged homes had a mortgage, that means 4,416 would be subject to NFIP. Roughly 25 percent of the homes damaged were designated to be in a SFHA. That indicates 1,104 of the homes found to be damaged by FEMA should have had coverage under the mandatory purchase requirement. That would be 239 percent more than the 461 claims reported by FEMA.
It is likely more than 9,000 homes were damaged and likewise all 461 claims were not for homes with mortgages in SFHAs that would be required to have coverage under the mandatory purchase requirement. The actual number of homes whose lender should have required or purchased flood insurance, but did not, is far greater than even indicated by the estimates above.
Inequalities Within The NFIP
In Florida, homeowner’s claims under the NFIP for Hurricane Ian in September 2022 received an average of $91,000. In eastern Kentucky, the average payout per claim from the historic flood in July of 2022 was just $49,000.
The difference in average insurance proceeds is due to several factors beyond intensity of the flood or the amount of damage. The disparity is largely due to inaccuracy of flood maps, low adoption of flood insurance, difference in income levels, and lack of institutional compliance with the mandatory purchase requirement.
FEMA, Major Disaster
Declaration – 4663
On July 29, 2022, the flooding in eastern Kentucky was declared a major disaster under the Stafford Act authorizing the use Federal Assistance. More than $281 million in federal funding has been spent on recovery efforts, with most going to individual housing assistance at $94,278,009.99.
Comparing the amount emergency disaster housing assistance provided to the amount paid in NFIP claims shows how the NFIP has fallen short of its goal in reducing disaster assistance costs and increasing the adoption of flood insurance. Taking this a step further, if there was strict compliance with the mandatory purchase requirement there would be another $30 million to $50 million of insurance proceeds to aid in the recovery.
Flood Maps
Another issue with the NFIP FEMA must address, especially for eastern Kentucky, is their flood maps and flood zone determinations. FEMA flood maps only take flooding along the coast or from major rivers into account. They do not account for flash flooding to smaller water sources and sewer systems, which was the main cause of the eastern Kentucky flood.
An analysis by the nonprofit First Street Foundation found that FEMA has greatly underrated the flood risk in eastern Kentucky. First Street found that in seven of the counties affected in the eastern Kentucky flood, 40,300 properties faced a significant flood risk where FEMA’s flood maps showed only 12,800 properties were in a flood zone. First Street also found that 28 percent of properties in eastern Kentucky are shown, incorrectly, on FEMA maps to be outside of a flood zone. Contrasted with the 25 counties in Florida declared a disaster after Hurricane Ian, where only two percent were shown incorrectly.
Flood Zone Determinations
In addition to the flood maps themselves, accurate determination of flood hazard status for a particular property is a separate issue. Flood zone determination companies complete more than 20 million determinations annually. There are cases throughout the country against CoreLogic and other flood zone determinations for erroneous flood zone determinations. Most of these companies use readily available geo-coded data that is inherently error -prone to complete certifications instantly. The NFIP would benefit by implementing standards or certifications for flood zone determination companies.
What Remedies Do Flood Victims Who Should Have Been Protected Under the NFIP Have?
The NFIP does not give borrowers a private right of action against lenders or flood zone determination companies, however, it does not prohibit a state court from finding negligence when there has been a violation. Also, a flood zone determination company could be liable for negligent misrepresentation by incorrectly certifying a flood zone because they knew they were contracted to perform the determination because of the borrowers’ interest in purchasing the property. It surely seems negligent and like the flood victim should not be the one left holding the bag, or even worse, wrongfully foreclosed.
Another possible avenue of recovery for victims could be the False Claims Act (FCA) 31 U.S.C. §§ 3729 – 3733. The FCA prohibits persons from knowingly submitting false claims to the government. The FCA allows private citizens to file suits on behalf of the government called “qui tam” suits.
Recently on June 29, 2023, the U.S. Attorney’s Office for the Northern District of New York announced Movement Mortgage, LLC, agreed to pay $23.75 million to resolve allegations that it violated the FCA by failing to comply with program requirements when it originated and underwrote mortgages insured by federal agencies. In the press release, U.S Attorney Carla B. Freedman said, “Lenders participating in mortgage programs backed by taxpayers must follow rules designed to protect both program integrity and homeowners.”
Similarly, on December 14, 2022, Academy Mortgage Corporation paid $38.5 million to resolve qui tam action under FCA for improperly originating and underwriting mortgages insured by the Federal Housing Administration. “Lenders that knowingly cause the government to guarantee loans that are materially deficient put both homeowners and the public at risk,” said Principal Deputy Assistant Attorney General Brian M. Boynton, head of the Justice Department’s Civil Division.
Lenders could be liable under the FCA for making false claims to the government that their loans comply with the NFIP. Moreover, the failure to comply with the mandatory purchase requirement has already negatively impacted not only the victims who should have had flood insurance, but also American taxpayers who are footing the bill for the additional disaster relief required in the absence of insurance.
H.R. 1307 —To Repeal the Mandatory Flood Insurance Coverage Requirement for Commercial Properties Located in Flood Hazard Areas, and for Other Purposes.
Congress is taking a run at NFIP renewal and reform again that has been operating on short-term extensions since 2017. H.R. 1307 would repeal the mandatory purchase requirement for commercial properties. While commercial properties are not the focus of this article nor the main issue eastern Kentucky has with the NFIP, repealing the mandatory purchase requirement in any way is moving in the wrong direction. Doing so will inevitably put this burden back on FEMA and taxpayers for the next flood. Additionally, requiring the minimum level of flood insurance for commercial properties in SFHA with secured debt is just good practice.
Risk Rating 2.0 – Equity in Action
FEMA is increasing premiums on flood insurance with its new rule called “Risk Rating 2.0—Equity in Action.” The average cost of flood insurance in the commonwealth will more than double, and some Kentuckians are looking at an increase of 700 percent.
Attorney General Daniel Cameron recently joined a lawsuit against FEMA, opposing the rate hike. In its lawsuit, a coalition of 10 attorneys general, including those from Florida, Idaho, Louisiana, Mississippi, Montana, North Dakota, South Carolina, Texas, and Virginia, points out that, “in fundamentally changing how [FEMA] calculates rates for federal flood insurance, [FEMA] bypassed nearly every substantive and procedural requirement under law.” Additionally, FEMA has failed to disclose its methodology and input data used in calculating Risk Rating 2.0—Equity in Action.
With the cost already being one of the main impediments to the widespread adoption of flood insurance in eastern Kentucky, this rate hike will compound the problem. Understandably, FEMA wants to charge higher premiums given the current insurance landscape, but for areas such as the 10 flood-damaged counties in eastern Kentucky, where the average median household income is $33,960, many will simply not be able to afford coverage.
— Bart Denham is a native of Lexington where he graduated from the University of Kentucky with a Bachelor of Business Administration in Marketing and a Juris Doctorate from the Rosenberg College of Law. He founded Denham Property and Injury Law Firm to focus on advocating for the rights of property loss and personal injury victims. He is licensed in Kentucky and Florida. Bart was inspired to dedicate his career to protecting the rights of others by his grandfather Glenn Denham who, after serving as a fighter pilot in the navy during World War Two, practiced law for 52 years and was president of the Kentucky Bar Association.