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Senate Flood Insurance Compromise Will Reduce Taxpayer Cost of Disasters

Posted By David C. John On June 28, 2012 @ 4:00 pm In Economics | Comments Disabled

Further scrambling to pay for transportation projects and the subsidized student loan interest rate freeze, Congress is now debating to add a five-year flood insurance extension to the burgeoning bill.

Revenue gained from higher premiums to the National Flood Insurance Program (NFIP) should begin to repay the $17.5 billion the program owes to taxpayers—not to pay for more spending. A related Senate measure under consideration, however, would help protect taxpayers from bearing a yet larger burden.

One of the many unpleasant discoveries of Hurricane Katrina was that houses built near levees and other flood-control projects are still at risk of flooding. If the levees fail due to design problems or because a storm is larger than they were built to withstand, nearby homes are just as likely to be damaged as homes built elsewhere.

These homes have been exempt from the requirement that structures in an area prone to flooding have federal flood insurance through the NFIP. When they are damaged anyway, taxpayers end up picking up much of the cost. Now, the Senate version of the NFIP reauthorization will correct this oversight.

Under the Cochran–Vitter–Landrieu–Hutchison Compromise in the Flood Insurance Reauthorization Bill (S. 1940), which is Section 107 of the Senate Substitute language, homes located near a levee or similar structure will be required to have NFIP coverage for the residual risk that a massive storm or flood will cause flooding in that area. These policies will have a lower cost than those for structures in riskier areas, but they will protect both homeowners and taxpayers if the levee fails.

Let’s be clear that this is not a mandate. Over 21,000 communities have chosen voluntarily to participate in the NFIP, and they can withdraw if they wish. The program began over 40 years ago to protect taxpayers living elsewhere from having to pay high disaster costs. The requirement that homeowners in flood-prone areas must have flood insurance is nothing new and has saved taxpayers billions of dollars [1].

The Senate compromise only fixes a gap in NFIP coverage. It recognizes that there is no such thing as a perfect flood prevention device, but it is appropriate for homeowners living in such areas—and taxpayers, who bear the excess costs. However, the proposal to use NFIP premium revenues to pay for transportation or student loan spending would be irresponsible.


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[1] saved taxpayers billions of dollars: http://www.heritage.org/research/reports/2012/06/reauthorize-and-reform-the-flood-insurance-program

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