BILL ANALYSIS
AB 1898
Page 1
Date of Hearing: April 24, 2006
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
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.
EXISTING FEDERAL LAW
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
4012a(b))
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
4012a(e)1)
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
rights."
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
insurer.
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
insurance.
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
damage.
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
comprehensive"
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
finds:
"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
floodplain."
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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Amendments
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
follows:
1)Line 17 on Page 2 and change the existing letter (b) to letter
(c).
(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
watersheds.
The notice shall include statements regarding all of the
following:
(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:
NOTICE OF REQUIREMENT TO PURCHASE FLOOD INSURANCE
This property is located within a flood hazard zone.
Flooding due to the
failure of a levee may cause significant risk to life and
property.
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
Committee)
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
Resources)
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
Government)
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
Appropriations)
ACA 13 (Harmon) allows local governments to impose assessments
to build flood protection infrastructure. (Assembly Local
Government)
REGISTERED SUPPORT / OPPOSITION :
Support
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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
Opposition
California Bankers Association
California Business Properties Association
California Chamber of Commerce
California Credit Union League
California Land Title Association
Cal-Tax
CMBA
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