10 States File Lawsuit Against Federal Government for Flood Insurance Rate Hikes

A casket is seen in a flooded cemetery on August 17, 2016 in Sorrento, Louisiana. Tremendous downpours has resulted in disastrous flooding, responsible for at least seven deaths and thousands of homes being damaged. Photo by Joe Raedle/Getty Images

The federal government is being sued by a coalition of states seeking to block a change in the calculation of flood insurance rates, which they say will make such insurance expensive for citizens.

The Federal Emergency Management Agency (FEMA) insists that its new insurance premium system, “Risk Rating 2.0,” is an improvement over past methods as it incorporates new data and scientific models and costs of rebuilding a home. The agency claims that under the old system, people with lower-valued homes could end up paying more than a fair share of insurance while those with higher-value homes pay relatively less. In a June 1 press release, Louisiana Attorney General Jeff Landry announced filing a lawsuit against FEMA and other federal agencies. He criticized the new FEMA system, arguing that it would end up making flood insurance more expensive for many people.

“Throughout Louisiana and many other states, homeowners and small businesses are struggling to afford flood insurance. The rising costs are directly attributable to federal government bureaucrats taking something that has worked for decades, shrouding it in mystery, and then making it worse,” said Landry.

The lawsuit, filed by 10 states, also lists dozens of local Louisiana governments as well as flood control districts as plaintiffs. The case was filed in a U.S. district court in New Orleans on Thursday. The new Risk Rating 2.0 came into effect for all new insurance policies beginning October 1, 2021, and for other policies on their renewal after April 1, 2022.

The average flood insurance premium policy jumps from $813 to $1,904 under the new system, per the lawsuit. This could result in a 1.42 percent reduction in home purchase capabilities, it stated.

Ninety percent of Louisiana insurance ratepayers subject to an increase in flood premiums may see their costs rise by 18 percent per annum for the next decade. In practice, this could mean that a policy that cost $572 per year in 2021 may eventually cost $8,000 annually under Risk Rating 2.0, the lawsuit argues.

The higher insurance costs could result in fewer policies, less coverage, and greater risk exposure for Louisiana and its citizens, it says.

“Thanks to FEMA’s Risk Rating 2.0, flood insurance policies have become their own natural disaster, with some premiums increasing tenfold for policyholders. We believe there are legal deficiencies in these poor decisions, and we intend to hold these bureaucrats accountable,” Landry said.

Old Versus New System

According to the lawsuit, the public had access to flood frequency data in their region in the previous insurance policy system. This made premiums consistent and predictable.

But in Risk Rating 2.0, the public has no way of determining how flood frequency relates to their premium. This is because the new system “relies on hypothetical events” while “secrecy dictates calculations.”

The old system provided discounts to homeowners who took flood mitigation efforts like elevating homes, improving drainage systems, and building levees. The new system does not take into account any mitigation efforts while calculating premiums.

Per the lawsuit, an estimated 15 million people lived in Special Flood Hazard Areas across the United States in 2015. Combined with other areas exposed to flood risks, an estimated 41 million people could end up getting affected by Risk Rating 2.0.

The lawsuit noted that some of the highest costs for flood insurance is now occurring in areas that were not in flood zones as per the previous FEMA maps.

Flood Risks to Mortgage Market

The FEMA lawsuit comes as concerns about flood risks to the mortgage market are popping up. Speaking to CNBC on May 28, Dave Burt, CEO of investment research firm DeltaTerra Capital, warned that the mortgage market is disregarding the risks of flooding, which could end up catalyzing a housing market crash.

Homes destroyed by floods tend to depreciate dramatically, which exposes the mortgage borrower to the risk of default. DeltaTerra’s studies suggest that 20 percent of homes in the United States have significant exposure to a pricing discrepancy due to flood risks.

The discrepancy could trigger an up to $200 billion devaluation in the housing market from its 2022 valuations. In case lenders fail to acknowledge the potential risks involved in flooding, a price adjustment similar to what happened during the 2008 housing crisis could materialize soon, he warned.

“Ultimately, until people have good information about what these climate-related costs are going to look like, we’re creating new problems every day. I think that’s really the crux of the matter.”