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March 2013 / The New York County Lawyer
Governor Cuomo’s Buyback Proposal Hinges on Reforms to Federal Flood Insurance Policy By Phillip Azachi
Even though these properties sit behind flood control structures, they bear a “residual risk” because the structures can fail if its capacity is exceeded. This was demonstrated by the catastrophic failure of the levees protecting New Orleans. The removal of the exemption would expand the total NFIP risk pool, which would lower average premiums, and provide insurance coverage for the risk posed by a catastrophic failure of flood control systems.6
Hurricane Sandy exposed the risks of floodplain development at a time of rising sea levels and extreme weather. To fortify New York State against flooding, Governor Andrew M. Cuomo is proposing to spend as much as $400 million of federal relief funds to purchase homes wrecked by Hurricane Sandy and then preserve the land permanently as undeveloped coastline.1 The success of the proposal will depend upon lowering buyout prices in the longer term and shifting the burden of flood risk management from the taxpayer to the homeowner, so that latter can properly perform a cost-benefit analysis of living in floodplains. Both objectives can be accomplished through continued reform of the National Flood Insurance Program (NFIP). While Gov. Cuomo’s proposal is unique in its scope, government officials will benefit from reviewing the history of buyouts. The Federal Emergency Management Agency (FEMA) has had voluntary buyout funds and authority since the 1980s. In its early years, the agency emphasized building levees, dams, and other flood mitigation structures. The 1993 Midwestern floods exposed the inefficacies of this approach, and FEMA started pushing for buyouts to return high risk flood zones to their natural state. FEMA has experienced limited success with buyout programs because of its costs. The government must compensate landowners for the fair market value of the purchased property, whether the government purchases the entire fee interest, a subsidiary right such as a conservation easement or development or redevelopment rights.2 But the fair market value does not reflect solely the land’s intrinsic value plus the homeowner’s improvements. It also reflects values arising from government actions. Any buyback program that does not account for government benefits will permit homeowners to double dip. Government actions that increase property values are known as givings in eminent domain jurisprudence. By building infrastructure that permits development to take place (or expand) and flood control measures that reduce the risk of flood-related damages, the government adds value to the property.3 Furthermore, where the government declares that it will not permit a floodplain landowner’s property to move, erode, or disappear (e.g. through disaster relief),4 the government again adds value. These givings distort market values because the costs of flood mitigation rest with the taxpayers and the benefit with homeowners. It is illogical then, if the government compensates homeowners for the value it has conferred. The federal government must recapture givings through buyouts. Of course, past givings cannot be recaptured because a clear and direct accounting of their relationship to value increments has never been recorded. The federal govern-
By maintaining the exemption, the government saps some of the incentive from the buyout program. Instead of adopting land use controls and purchasing federal insurance, protected communities are more likely to cluster development behind flood control structures.7 The protected communities can then shift financial responsibility to taxpayers to maintain flood control systems. The federal government should eliminate this exemption so homeowners can properly consider the costs and benefits of residing in floodplains. Governor Cuomo in Lindenhurst, Long Island surveying the destruction from Hurricane Sandy and meeting with residents whose shoreside homes were destroyed.
ment must focus on recapturing future givings over the lifetime of any New York State buyout program.
greater financial responsibility on homeowners that want to stay in flood-prone communities.
NFIP is an adequate vehicle for a givings recapture scheme because it provides below-market-rate flood insurance. Congress should amend the NFIP to explicitly recognize the amount of the subsidy difference between NFIP rates and what the private insurance market would charge for comparable coverage.5 The difference would be deemed as a credit against a future buyout. The government will avoid paying for the benefits it confers upon homeowners, and the homeowner will still receive just compensation.
One shortfall of the Reform Act is the failure to require property owners in residual risk areas to purchase insurance. Residual risk areas are areas protected by levees, dams or other flood control structures that would be subject to flooding if not for the protective structure. Pursuant to the National Flood Insurance Act, FEMA must map all communities containing a 100-year floodplain, including the residual risk areas. FEMA can then offer flood insurance to residents of communities containing any portion of a 100-year floodplain, provided their communities agree to adopt local land-use ordinances and building codes that meet minimum federal standards for floodplain development. Homeowners living in an area designated a “special flood hazard area” within the participating communities must purchase insurance to receive federallybacked mortgages. However, the NFIP exempts residual risk properties from the mandatory requirements applicable to properties in special flood hazard areas.
The federal government must also change homeowners’ perceptions about the utility of living in floodplains to entice them to sell. Since the federal government bears the burden of providing disaster relief, flood mitigation structures and belowmarket-rate flood insurance, the true costs of floodplain residency are not reflected in homeowners’ cost-benefit analysis. The buyout program is less appealing because homeowners believe it is more expensive to move than stay. Recent reforms to the NFIP have compelled floodplain homeowners to adjust their calculations because responsibility for flood risk management has shifted to them. The Biggert-Waters Flood Insurance Reform Act of 2012 (Reform Act) limits the availability of subsidized risk premiums. Subsidized rates are no longer extended to second homes, business properties, severe repetitive loss properties, and properties incurring flood damages that equal or exceed the fair market value of the property. Furthermore, sellers of structures insured before January 1, 1975 can no longer transfer their subsidized premium rates to buyers. These changes place
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As federal officials consider Cuomo’s proposal, they should consider the proposal’s long-term success to be contingent upon recapturing givings and compelling homeowners to assume the costs of continued floodplain living. The continued reformation of the NFIP is the means for accomplishing both tasks. Phillip Azachi, a NYCLA and Environmental Committee Member, is a recent graduate of CUNY School of Law, and is interested in environmental and real estate issues. References: 1 Thomas Kaplan, “Cuomo is Seeking to Curb Building in Flooded Area,” New York Times, February 4, 2013, at A1. 2 Daniel D. Barnhizer, Givings Recapture: Funding Public Acquisition of Private Property Interests on the Coasts, 27 Harv. Envtl. L. Rev. 295, 316 (2003). 3Id., Barnhizer at 318 4Id., Barnhizer at 320-21 5Id., Barnhizer at 367 – 373. 6 Jessica Granis, Analysis of How Flood Insurance Reform Act of 2012 MayAffectState and Local Adaptation Efforts, GeorgetownClimateCenter, available at: http://www.georgetownclimate.org/sites/default/f iles/Analysis%20of%20the%20Flood%20Insura nce%20Reform%20Act%20of%202012.pdf 7Id.
Department of Financial Services to Speed Resolution of Insurance Claims in Areas Affected by Sandy The Department of Financial Services (DFS) is setting new rules to speed the processing of insurance claims in areas affected by Storm Sandy. The new regulation reduces the amount of time an insurer can delay its decision on a claim, and requires insurers to report to the Department on how many claims it is delaying and the reasons for the delays. In response to the complaints that insurance companies are taking too long to accept or deny Sandy-related claims, the Department is instituting the following changes. • If an insurer is unable to make a claims decision within the allotted time, extensions are now only 30 days, not 90 days.
• Any extension letter sent to an insured must provide not just the reason for the extension, but an estimate of the date the insurer expects the decisionmaking process to be completed. • Insurers must report to DFS weekly on every claim that has been extended past the initial 15 business day decision window. This report will include, among other items, the amount of the claimed loss, the reason needed for the insurer’s extension, the number of extensions the insurer already has utilized, and the expected date for its decision. • Notification to claimants of what documents and forms will be needed to complete the claim must now be provided in a written, detailed document.