BILL ANALYSIS                                                                                                                                                                                                    

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          Date of Hearing:   April 24, 2006

                                 Ron Calderon, Chair
                    AB 1898 (Jones) - As Amended:  April 18, 2005
          SUBJECT  :   Flood insurance

           SUMMARY  :   Requires owners of property located in flood hazard  
          zones within the Sacramento River or San Joaquin River  
          watersheds to maintain flood insurance through the National  
          Flood Insurance Program (NFIP), unless the state or other agency  
          responsible for operation of the levee system determines that  
          the levee system protecting the property provides at least  
          200-year flood protection.   This bill would become effective  
          July 1, 2007.  


          1)Under NFIP, federally subsidized flood insurance is made  
            available to owners of flood-prone property in participating  
            communities. Coverage is available both for the structure  
            itself (up to $250,000 for a single family structure) and for  
            contents (up to $100,000).  (National Flood Insurance Act NFIA  
            (42 U.S.C.  4001 et seq.  All further references are to  
            provisions of the NFIA)

          2)Provides that no lender may make or renew a loan on specified  
            (property without at least 100-year protection) property  
            unless the property is covered by flood insurance.   (Section  

          3)States that flood insurance is not required for any  
            state-owned property that is covered under an adequate state  
            policy of self-insurance.  (Section 4012a(c)1)

          4)Provides that if anytime during the life of a home loan if the  
            area in which the home is located in is determined to be  
            within an area having special flood hazards then the lender or  
            loan servicer shall contact the borrower informing them of  
            their obligation to purchase flood insurance.  (Section  

          5)Specifies that if the borrower fails to purchase flood  
            insurance within 45 days after notification then the lender or  


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            servicer for the loan shall purchase the insurance on behalf  
            of the borrower and may charge the borrower for the cost of  
            premiums and fees incurred by the lender.  (Section 4012a(e)2)

          6)Provides that a regulated lending institution, as well as, the  
            Federal National Mortgage Association (Fannie Mae) and the  
            Federal Home Loan Mortgage Corporation (Freddie Mac) shall be  
            liable for civil monetary penalties for failing to require the  
            purchase of flood insurance in the defined areas or failure to  
            notify a borrower of their obligation to purchase flood  
            insurance.  (Section 4012a(f)1-3)

           FISCAL EFFECT  :  Unknown

           COMMENTS  :   

          According to the author, this bill was prompted by a January  
          2005 report issued by the California Department of Water  
          Resources (DWR) entitled  Flood Warnings: Responding to  
          California's Flood Crisis.  

          This bill would require property owners to obtain and maintain  
          flood insurance through the NFIP if their property is located in  
          flood hazard zones within the Sacramento River or San Joaquin  
          River watersheds, and has less than 200-year flood protection.  

          Federal law requires property owners and business owners to  
          purchase flood insurance for all federal or federally-backed  
          financial assistance for the acquisition and/or construction of  
          buildings in high-risk flood areas (Special Flood Hazard Areas  
          or SFHAs).  Flood insurance must be maintained during the term  
          of the loan and is required for the lesser of the maximum amount  
          of available NFIP coverage or the outstanding principal balance  
          of the loan (less the land value).   Lenders must ensure that  
          borrowers purchase and maintain flood insurance for the duration  
          of the loan and if the borrow fails to maintain the flood  
          insurance policy, the lender purchases the insurance on behalf  
          of the borrower and charges the borrow for the cost of the  
          premiums and fees incurred.

          The author also noted the results of The 2006 Sacramento State  
          (5th) Annual Survey of the Region, wherein 66% of residents in  
          the Sacramento Region favor the proposal that would require all  
          property owners protected by levees to buy flood insurance.  In  
          that same survey, 22% were opposed and 12% were undecided.  This  


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          study is a computer-assisted telephone interview of 1122 adult  
          residents age 18 and older from randomly selected households in  
          the Sacramento region, including Sacramento, Yolo, Placer, and  
          El Dorado Counties.  

          Sacramento's risk of flooding is the greatest of any major city  
          in the country.  DWR estimates that a 200-year flood in  
          Sacramento would result in $11.2 billion in property damage.   
          Buying a home is the largest investment that most of us will  
          ever make and it can all be lost with one catastrophic flood.   
          Experts agree that property owners without 200-year flood  
          protection should purchase flood insurance.  

           History of NFIA

           Flooding is a major source of loss to individuals and businesses  
          in the United States.
          Private insurers have historically been unable to provide flood  
          insurance at affordable rates in the marketplace, and until the  
          establishment of the NFIP in 1968, the primary recourse for  
          flood victims was government disaster assistance. 

          Congress adopted the program in response to the ongoing  
          unavailability of private insurance and continued increases in  
          federal disaster assistance.  The NFIP makes flood insurance  
          available to homeowners, renters, and businesses in communities  
          that participate in the NFIP. In return, participating  
          communities agree to adopt and enforce a floodplain management  
          program aimed at reducing their flood losses. The central  
          requirement of the flood management program is that new  
          residential construction in SFHAs be elevated at or above the  
          level water would reach in a flood that occurs with 1 percent  
          annual chance (the base flood elevation, or BFE).  Existing  
          residential structures that are built below BFE must also be  
          raised to BFE if they are more than 50 percent damaged by flood.  
          New nonresidential construction in the SFHA must either be  
          elevated or flood proofed against the 1 percent annual chance  
          flood and must be upgraded if they do not meet these  
          requirements and are more than 50 percent damaged by flood.  

          Early in the program, the federal government found that making  
          insurance available, even at subsidized rates for existing  
          buildings, was not a sufficient incentive for communities to  
          join the NFIP or for individuals to purchase flood insurance. In  
          the early 1970s, only 95,000 flood insurance policies were in  


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          force and only a few thousand communities participated in the  
          program.  In response, Congress passed the Flood Disaster  
          Protection Act of 1973, which obligates federally regulated  
          lenders to require flood insurance as a condition of granting or  
          continuing a loan when the buildings and improvements securing  
          it are in the SFHA of a community participating in the NFIP.  
          Loans on homes in SFHAs sold to government sponsored enterprises  
          such as Fannie Mae and Freddie Mac are also subject to this  
          mandatory purchase requirement. Specifically, Fannie Mae and  
          Freddie Mac are not allowed to purchase mortgages on the  
          secondary market unless they meet the insurance requirement.   
          The Act prohibits federal agencies from providing financial  
          assistance for acquiring or constructing buildings and from  
          providing certain disaster assistance in the SFHA of any  
          community that did not join in the NFIP by July 1, 1975, or  
          within one year of being identified as flood-prone.  The  
          mandatory purchase requirement was strengthened by the National  
          Flood Insurance Reform Act of 1994.

          The number of communities participating in the program and the  
          number of
          policyholders grew dramatically as a result of these two laws.  
          Currently, over 20,000
          communities participate in the program, and over 4.5 million  
          flood policies are in place. 

          NFIP's Preferred Risk Policy (PRP) offers low-cost protection  
          for homes in areas of low to moderate risk (such as those with  
          100-year protection, but without 200 year-protection).  The cost  
          for these policies is $137-$352 annually, depending on the  
          amount of coverage purchased.  Furthermore, it is unclear, with  
          the enactment of this bill whether the flood hazard zones of  
          Sacrament/San Joaquin Watersheds would be considered moderate or  
          high risk.  Under normal circumstances a NFIP policy that would  
          include areas above the low to moderate risk threshold could  
          cost in a range from $489-$1,822 per year depending on whether a  
          structure and/or its contents are covered.

           What is a 100-year flood?
          Confusion exists at the public level in regards to 100-year  
          floods.  Many believe it means a flood that will occur once  
          every 100 years. Rather, it is the flood elevation that has a 1-  
          percent chance of being equaled or exceeded each year. Thus, the  
          100-year flood could occur more than once in a relatively short  


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          period of time. The 100-year flood, which is the standard used  
          by most Federal and state agencies, is used by the NFIP as the  
          standard for floodplain management and to determine the need for  
          flood insurance. A structure located within a special flood  
          hazard area shown on an NFIP map has a 26 percent chance of  
          suffering flood damage during the term of a 30-year mortgage.  
           Arguments in support.

           In support of the bill, the California Central Valley Flood  
          Control Association believes that flood insurance coverage for  
          property located in a flood plain is an important part of a  
          comprehensive state flood control strategy that includes flood  
          control facility improvements, flood preparedness planning, land  
          use planning reform, and liability reform.  The Association  
          supports the creation of a state flood insurance requirement to  
          aid in reducing government exposure to inverse condemnation  
          lawsuits and to provide an alternative to disaster assistance  
          that results in escalating costs for repairing damage to  
          buildings, personal property and critical infrastructure.  The  
          state program, at a minimum, should be based on a mandatory  
          offer of coverage to all property owners within a flood plain  
          lying behind levees and should be provided or coordinated
          through NFIP.

          The Gray Panthers find that those homeowners living in flood  
          hazard zones must take some responsibility for insuring their  
          property against the damages flooding and they should not leave  
          the situation to chance and then look to the State's General  
          Fund to pay for the cost.

           Arguments in opposition.

           The Personal Insurance Federation of California (PIFC) writes in  
          opposition that the expansion of the NFIP at the state level is  
          premature because there is not enough information about the  
          possible impacts of expanding the program.  Furthermore, PIFC  
          thinks that the better approach would be to further study the  
          idea at the federal level prior to expanding the program.  PIFC  
          was part of a working group in 2005, made up of industry  
          participants, who came up with a list of "consensus reforms."   
          Among those reforms was the suggestion of providing funding for  
          map modernization, consider increasing premiums and deductibles,  
          increasing deductibles and require the Government Accounting  
          Office to study how increasing participation in NFIP might  


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          affect the program.

          In addition, a coalition of opposition groups believe that the  
          NFIP is not financially sound enough to meet potential claims  
          that could arise in California.  Furthermore, they write:

               "The measure fails to identify and anticipate significant  
               mechanical implementation issues. The measure presumes that  
               federal agencies will monitor state law. Questions remain  
               as to whether FEMA would certify California maps for  
               qualifying property owners for NFIP coverage. It is very  
               likely that maps developed on the state level and maps  
               developed on the federal level will not fully complement  
               one another. The measure fails to consider resolution to  
               conflicts between state and federal maps and does not  
               identify what entity would be charged with resolving those  
               disputes. Would DWR be responsible for resolving disputes  
               or would this obligation be charged to another state agency  
               or department? Presumably, California would have to  
               establish and fund a state program to respond to inquiries  
               and to resolve disputes"
          Paterno v. State of California, supra, 74 Cal.App.4th at 89.

           In Feburary 1986, warm weather system brough massive amounts of  
          warm rain that inudated northern California water systems and  
          caused premature snow melt that led to further flooding.  At the  
          confluence of the Yuba and Feather Rivers the Linda levee  
          conlapsed causeing damages to hundreds of millions in property.   
          All parties to the resulting case stipulated that Paterno's  
          property was damaged as a proximaite result of the failure of  
          public flood control project.  At trial, the state argued that  
          Mr. Paterno could "adequately bear the risk of flooding" by  
          purchasing flood insurance and that his failure to do so should  
          relieve the state from its liability.  The Court was not  
          persuaded by this argument, stating that "Insurance does not  
          eliminate the loss, it simply shifts the loss from the landowner  
          to the insurer, which is then entitled to assert its subrogation  

          The California Bankers Association (CBA) points out this bill  
          does nothing to eliminate risk to the state.  The state faced  
          significant liability in Paterno for its failure to adequately  
          construct and maintain the levee system.  Since a party's rights  
          would be subrogated to the insurer, CBA believes that this  


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          measure fails to protect the state from liability and merely  
          shifts the right to sue to another party, likely to be the  

          The author contends that this measure would help reduce the  
          amount of damages payable by the state should the levees fail.   
          It is not the mission of this Committee to make a legal  
          determination of liability however, clearly, the Paterno  
          decision raises questions as to the state's liability in the  
          event of a levee failure. 

           Financial difficulties of NFIP  .

          Due to the devastation of Hurricanes Katrina and Rita, the NFIP  
          recently sought out Congressional authority to borrow up to  
          $20.8 billion from the United States Treasury to cover some  
          225,000 claims.   Prior to last year's hurricanes the borrowing  
          limit was set at $1.5 billion.  Many estimate that total claims  
          will add up to $24 billion, more than the total ever paid out  
          during the entire life of the program.  Furthermore, Congress is  
          considering legislation that would give FEMA more authority to  
          raise rates and increase fines for non-mandatory purchase of  

          According to one DWR scenario, three levee breaks in a  
          "200-year" storm could cause $11 billion in property damages and  
          up to $15 billion more in lost wages.  It is uncertain whether  
          NFIP would be capable of paying all claims after such a  
          significant disaster, or that due to the significant claims left  
          to pay out due to Katrina and Rita whether new premiums paid  
          into the program will only go to backfill past losses.

           Flood Warnings: Responding to California's Flood Crisis.

           As previously mentioned, one of the factors behind this  
          legislation was the DWR report sharing the title of this  
          section.  The report contained the following key strategies for  
          addressing the risk of flooding:

          1)Examine existing flood insurance requirements and consider the  
            creation of a "California Flood Insurance Fund," a sustainable  
            State insurance fund to compensate property owners for flood  

          2)Create a Central Valley Flood Control Assessment District with  


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            the authority to assess fees that would provide adequate flood  
            control protection for regional participants.

          3)Enact legislative and constitutional changes that would reduce  
            taxpayer exposure for funding flood disaster claims. Revisions  
            would include constitutional amendments to exempt flood  
            control projects from inverse condemnation liability and  
            exempt local flood control districts from the Proposition 218  
            two-thirds voting requirement.

          In making the recommendation for greater insurance coverage DWR  
          made the following conclusion:

               "The State should reduce its liability by requiring that  
               all homes and businesses in areas at risk of flooding,  
               regardless of the level of protection, to have some form of  
               flood insurance. This will require legislation to enable  
               the State to implement a system of flood insurance similar  
               to the National Flood Insurance Program (NFIP), yet more  

           Issues for consideration.

           There is little debate that California, specifically Northern  
          California, faces a significant chance of a flooding disaster.   
          It is only prudent and reasonable that state and local  
          government seek out ways to improve our flood control system, as  
          well as, individuals taking personally initiative to prepare for  
          a disaster.  

          Recently, Lynn Scarlett, the acting director of the United  
          States Department of the Interior, conducted an aerial tour of  
          Northern California and found that, in spite of overwhelming  
          concern and evidence to the contrary, that our levees are in  
          good shape at this point in the year.  Furthermore, Director  
          Scarlett was unable to commit any federal help for repair of the  
          levees.  The citizens of California are left to trust that the  
          federal government will come to our aid prior to a disaster  
          taking place.  Unfortunately, the federal government's  
          performance in preparing for flooding disasters is lackadaisical  
          at best and under-whelming even in the critical stages of  
          recovery following an event.  

          There is some question as to whether we can rely on NFIP or the  
          federal government in protecting us from disaster.  Can  


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          California rely on the federal government after its poor  
          performance regarding flood control issues?   The NFIP continues  
          to pay claims and is clean of the criticism leveled at FEMA,  
          however will they even accept this new population of persons  
          seeking coverage, and are they in a position to pay claims  
          should a large-scale disaster take place?

          At this time, the state undertakes enormous liability for the  
          repair and funding of flood control projects, and the clean up  
          of a disaster.  Furthermore, as shown in the Paterno decision,  
          the state faces potential liability in the event of a levee  
          failure yet the state has no role in local zoning policy.   
          Communities continue to build in areas that just a few years ago  
          appeared under water in the winter rainy season.  The flood  
          insurance for these marginally safe developments lulls the  
          home-owner into a false sense of security.  Local governments  
          continue to allow unabated growth in areas that only due to the  
          brute force of moving the land and engineering the impossible,  
          allow the building of homes and businesses.  

          The RAND corporation conducted a study titled The National Flood  
          Insurance Program's Market Penetration Rate, Estimates and  
          Policy Implications.  In a section dealing with levels of  
          insurance and its influence on disaster assistance, the study  

               "For instance, it could be that flood insurance decreases  
               the amount of disaster assistance necessary for a given  
               disaster, but leads to greater likelihood of a disaster  
               being declared because it encourages development in  

          Lastly, as raised by the opposition it is unknown if the federal  
          government will allow the state to expand NFIP through state  
          action.  Furthermore, it is possible that due to the new  
          population to be included in this program that that NFIP may  
          determine that no home loan can be made to people without 200  
          year protection, and that such mortgages without insurance could  
          not be sold on the secondary mortgage market.  Even with such a  
          requirement, persons who currently own a home would not be  
          covered due to a lack of enforcement mechanism.  At the same  
          time, it is only an assumption that the NFIP may require lenders  
          to be the enforcement mechanism, yet if this does not happen,  
          this bill lacks a means to compel compliance.


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           The author wishes to offer amendments that would require an  
          annual notice to homeowners by the State Board of Reclamation  
          regarding the responsibility of homeowners in the defined zones  
          to purchase flood insurance.  The proposed amendments are as  

          1)Line 17 on Page 2 and change the existing letter (b) to letter  

               (b) On or before July 1, 2007, and on or before July 1 of  
               each year thereafter, the Board of Reclamation shall  
               provide written notice to each landowner whose property is  
               determined to be entirely or partially within a flood  
               hazard zone within the Sacramento or San Joaquin River  
               The notice shall include statements regarding all of the  
               (1) The property is located behind a levee.
               (2) Levees reduce, but do not eliminate, the risk of  
               flooding and are subject to catastrophic failure.
               (3) The landowner is required by the state to have flood  
               insurance for any buildings on the property to protect the  
               owner from loss.
                                                                            (4) The notice shall contain the following statement:
               This property is located within a flood hazard zone.  
          Flooding due to the
               failure of a levee may cause significant risk to life and  
               The State of California requires property owners in a flood  
               hazard zone within the Sacramento or San Joaquin River  
               watersheds to obtain flood insurance, such as the insurance  
               provided by the Federal Emergency Management Agency through  
               the National Flood Insurance Program.
               (5) Information about purchasing federal flood insurance.

           Related legislation.

           AB 798 (Wolk), extends the state funding for 75% of Delta levee  
          maintenance or improvement projects.  (Senate Natural Resources  

          AB 802 (Wolk), requires local governments to include flood  


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          management in the conservation and safety elements of their  
          general plans.  (Senate Local Government)

          AB 1665 (Laird), Changes the name of the Reclamation Board to  
          the Central Valley Flood Control Board, and requires the Board  
          to improve safety of Central Valley levees.  (Senate Natural  

          AB 1899 (Wolk), requires a local agency to obtain verification  
          from the state Reclamation Board as to whether the lands upon  
          which a proposed subdivision in a flood hazard zone is located  
          meet or will meet a 200-year standard of flood protection, as  
          defined, and requires a city or county to obtain a flood  
          protection information assessment from the appropriate flood  
          management agency in specified circumstances.  (Assembly Local  

          AB 2208 (Jones), requires the Department of Water Resources, in  
          consultation with the Reclamation Board, to conduct a study to  
          identify the persons or entities that benefit from the delta  
          levee and conveyance system and to submit a report to the  
          Legislature by January 1, 2008, that reflects the conclusions of  
          the study. The bill would require   the department to include in  
          the report recommendations as to those persons and entities on  
          which a user fee should be imposed to create a dedicated revenue  
          stream to pay for improvements to the delta levee and conveyance  
          system.  (Assembly Water, Parks and Wildlife)

          AB 2500 (Laird), prohibits the state from providing funds for  
          the upgrade of a Reclamation Board project levee unless the  
          beneficiary city or county agrees to adopt a safety plan.   
          (Assembly Appropriations)

          AB 3050 (Committee on Judiciary), ensures that liability is  
          spread among all of the state and local government entities that  
          are responsible for the resulting damage.  (Assembly  

          ACA 13 (Harmon) allows local governments to impose assessments  
          to build flood protection infrastructure.  (Assembly Local  




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          Association of State Floodplain Managers, Inc.
          California Central Valley Flood Control Association
          California State Controller
          Gray Panthers California
          The League of California Homeowners

          California Bankers Association
          California Business Properties Association
          California Chamber of Commerce
          California Credit Union League
          California Land Title Association
          Howard Jarvis Taxpayers Association
          Orange County Board of Supervisors
          Pacific Association of Domestic Insurance Companies
          The Personal Insurance Federation of California
          Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081