Credit: Getty Images/Tim Wright
Concerns of a potential government shutdown are top of mind this week as funding for federal agencies and programs is set to expire at midnight on Friday, March 14. A primary worry for insurance experts and homeowners is the looming expiration of the National Flood Insurance Program (NFIP), which provides federally-backed flood insurance to 4.7 million Americans. While this wouldn’t be the first time the NFIP has lapsed, allowing the program to expire could leave homeowners, business owners and renters without accessible flood coverage — especially those trying to apply for coverage or renew their policies.
What happens if the NFIP expires?
An NFIP lapse would suspend all new flood polices, plus renewals of existing policies, until funding is reinstated. According to the National Association of Realtors (NAR), “Existing NFIP policies will remain in effect until their expiration date, and claims will continue to be paid as long as FEMA hasthe funds on hand.”
The NFIP lapsed four times between 2008 and 2012, according to the Congressional Research Service, but the program was reauthorized retroactively each time, preventing coverage gaps for policyholders. Homebuyers do have one potential avenue to secure federal flood insurance, even during an NFIP lapse. The NFIP allows for the “assignment of policies,” meaning the buyer’s name can be substituted for the seller’s in an existing flood policy. This allows the buyer to take over the policy for its remaining term length.
“If you’re buying a home in a high-risk flood zone and you’re taking out a mortgage, your lender almost certainly will require you to buy flood insurance,” says Bankrate principal mortgage reporter Jeff Ostrowski. During a month-long lapse in 2010 (June 1-July 2), it’s estimated over 1,400 home sale closings were canceled or delayed daily — more than 40,000 sales total. NAR estimates that a program suspension today would have a similar impact, with an estimated 1,360 daily property sales affected.
In theory, some buyers could find themselves unable to close on home loans. But it wouldn’t be the first time federal funding for flood insurance has lapsed. So while this uncertainty isn’t ideal for buyers, the political drama doesn’t seem likely to kill home sales.
— Jeff Ostrowski, Bankrate principal mortgage reporter
Can we avoid an NFIP lapse?
To prevent an NFIP lapse, the Senate would have to approve funding before the end of the day Friday to reauthorize the program. The House of Representatives voted to approve a continuing resolution (CR) funding proposition from Republicans late yesterday afternoon which would extend government funding through September, including NFIP funding.
NFIP funding has historically received bipartisan support, but additional funding measures in the bill, like increased Immigration and Customs Enforcement funding, have received pushback from both Democratic and Republican lawmakers. Critics also point out that the measure lacks a Congressional statement of direction on how agencies can use their allocated funds, opening the door for the Trump administration and the Department of Government Efficiency to manipulate funding allocation. Rep. DeLauro (D-Ct.) responded to the bill: “This is not a clean CR. This bill is a blank check.”
Now the measure progresses to the Senate, where it needs 60 votes to pass, but Republicans only hold a 53-seat majority. If the measure fails to progress, lawmakers’ strategy would likely shift to shorter-term funding measures.
Sen. John Kennedy (R-La.) proposed a bill last year that would have extended NFIP reauthorization well into 2025, but it failed to progress to the Senate floor. Louisiana has one of the highest percentages of homes with NFIP coverage in the country, with over 433,000 active policies. Kennedy has been vocal about not only the preservation of the NFIP, but also reform to ensure the program remains viable and effective. The Louisiana senator is working with fellow Republicans on the Senate Banking Committee to craft legislation to potentially expand federal insurance programs to cover other natural disasters, like wildfires and hail storms.
What if I have private flood insurance?
Private flood insurance is not affected by an NFIP lapse. There is a chance that private insurers would see an increase in applications from homeowners who are unable to apply for NFIP policies. Private flood insurance policies can be more robust than NFIP policies — which are capped at $250,000 in building coverage and $100,000 in contents coverage — but premiums are usually more expensive, and carriers may be hesitant to take on policyholders in high-risk areas. The NFIP was initially created in 1968 because the private market failed to provide adequate coverage during large-scale flood events.
The NFIP plays a crucial role in flood protection and mitigation in the U.S. The private flood insurance sector is limited and often inaccessible or unaffordable in high-risk areas of the country. If the NFIP has an extended lapse, current homeowners may be unable to secure private coverage.
— Shannon Martin, Bankrate insurance analyst
Bottom line
The fate of the NFIP will be determined by a Senate funding vote this week or by the Friday deadline.
If the program is allowed to expire, the severity of the situation will depend on how long it takes to reinstate funding. Existing policyholders should check their policy expiration date to see if they are at risk of nonrenewal during the program lapse. The NFIP alerts policyholders 45 days before their policy period ends, so if your renewal date is coming up, you may be able to contact your agent to renew your policy. Note that NFIP policies must be renewed each year and do not automatically renew.
Homebuyers and those at risk of nonrenewal can explore quotes from private insurers if they’re concerned about a coverage gap. When funding is restored, pay attention to the option of retroactive coverage. If the funding approval is retroactive, homeowners will be able to apply for coverage during the period when the NFIP lapsed. This applies to new policies and renewals.
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