[Federal Register Volume 62, Number 242 (Wednesday, December 17, 1997)]
[Rules and Regulations]
[Pages 66026-66029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32945]


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FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 61

RIN 3067-AC73


National Flood Insurance Program (NFIP); Standard Flood Insurance 
Policy

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Final rule.

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SUMMARY: This rule increases the amount of the deductible under the 
Standard Flood Insurance Policy--from $750 to $1,000--for structures 
with subsidized coverage.

EFFECTIVE DATE: May 1, 1998.

FOR FURTHER INFORMATION CONTACT: Charles M. Plaxico, Jr., Federal 
Emergency Management Agency, Federal Insurance Administration, 202-646-
3422, (facsimile) 202-646-4327.

SUPPLEMENTARY INFORMATION: On October 7, 1997, FEMA published in the 
Federal Register, 62 FR 52304, a proposed rule to amend the regulations 
of the National Flood Insurance Program (NFIP) to increase the 
deductible from $750 to $1,000 for structures with subsidized coverage. 
The proposal also described a buy-back feature that would permit 
insureds to `buy back,' in consideration of additional premium, a 
reduced deductible under the Standard Flood Insurance Policy (SFIP).
    During the comment period, comments were received from: The Flood 
Insurance Producers National Committee (FIPNC), a staff underwriter 
from one of the insurance companies participating in the NFIP's Write 
Your Own (WYO) program, and the Association of State Flood Plain 
Managers (ASFPM).
    FIPNC agreed with the proposed change in its entirety and 
recommended that the amount of the reduced deductible that a 
policyholder could buy back be set at $500. While the policy language 
itself will remain silent on the amount of the reduced buy-back, the 
$500 figure is the amount contemplated by the Federal Insurance 
Administration in implementing this rule.

[[Page 66027]]

    The underwriter from one of the WYO companies expressed concern 
that changing the deductible would introduce complexities that would 
undermine the NFIP's growth and policy sales goals. Assuming that the 
commenter is referring to the underwriting steps to reduce the 
deductible to $500 for an additional charge, any additional complexity 
is more than offset by the ability of the insured to purchase the 
desired coverage. Since optional increased deductibles have already 
been available for many years, it would appear that the flexibility to 
reduce the deductible does not add any large degree of complexity in 
writing the policy.
    The underwriter also expressed concern that increasing the 
deductible and offering a buy-back would require ``enormous changes'' 
to the computer systems of a participating company. It is unclear why 
this would be necessary. The FIA consulted with the NFIP Bureau and 
Statistical Agent and several WYO companies before initiating 
rulemaking. There was no indication at all that establishing a 
surcharge for an optional deductible would pose any difficulty. From 
past experience, the proposed lead-time for implementing this change 
should be adequate.
    The underwriter also raised the question of whether increasing the 
deductible would ``provide enough benefit to warrant such a drastic 
change.'' It is FEMA's position that the change is far from ``drastic'' 
and actually is only a modest one for agents and companies 
participating under the WYO Program. The reason for implementing this 
change is to benefit the general body of taxpayers by distributing 
costs more equitably between the public taxpayers who have subsidized 
the coverage and the policyholders who benefit from less than actuarial 
rates.
    The last issue raised by the insurance underwriter focused on 
whether the deductible will be accepted by mortgage companies and 
recommended that FEMA coordinate the rule change with lending 
institutions prior to implementation. It is a standard procedure for 
FEMA to coordinate with the Federal agencies that regulate lending 
activities any change connected with the National Flood Insurance 
Program. This change will be no exception. Before the effective date of 
May 1, 1998, in addition to the close coordination FEMA will make with 
these agencies, FEMA will incorporate this change in its lenders 
workshops scheduled for this fiscal year.
    ASFPM, the third commenter, believed that the ``Federal Insurance 
Administration (FIA) has unnecessarily narrowed its options for 
building reserves for catastrophic loss years.'' ASFPM recommended that 
before FIA inaugurates an increase in the deductible for subsidized 
policies other measures should be taken. ASFPM said that, ``Limiting 
the options to those whose costs are borne by the policy holder ignores 
a number of programmatic, process, and operational measures that should 
be examined. FIA has a responsibility to demonstrate to Congress, and 
the rate payers, that its performance as a business is efficient.''
    FEMA disagrees that it has restricted its options. To increase the 
deductible for subsidized policies through rulemaking, which is the 
necessary and appropriate vehicle for changes to the Standard Flood 
Insurance Policy, does not prevent FEMA from continuing to pursue other 
program improvements that do not require rulemaking, such as the ones 
recommended by the Association. FEMA does not believe that it serves 
business efficiency by delaying modest actions that can reasonably be 
taken now to reduce outlays from the National Flood Insurance Fund 
while other initiatives, including some of those proposed by the 
Association, are already underway independent of rulemaking.
    ASFPM also expressed concern that the NFIP's `` `administrative 
grandfathering' measure allows a policyholder to `lock in' a rate 
regardless of future changes in risk or in the mapped Special Flood 
Hazard Area.'' Unlike the ``lock in'' feature of many home purchase 
agreements where a homebuyer may ``lock in'' a set interest rate for 
his or her mortgage loan for the term of the loan and can thereby be 
assured of the same monthly payment for the entire term of the loan, 
there are no such guarantees for policy-holders under the NFIP. While 
the policyholder with a pre-FIRM structure may be entitled under the 
NFIP's ``administrative grandfathering'' provision to the same risk 
classification, it does not guarantee that the policyholder will not 
experience an increase in the premium paid each year for flood 
insurance coverage. The entire issue of ``administrative 
grandfathering,'' however, is under review by the Federal Insurance 
Administration. In the meantime, FEMA will implement this modest change 
of increasing the deductible for subsidized policies.
    FEMA agrees wholeheartedly with the ASFPM's recommendation that 
underused, low-cost mitigation measures should be encouraged, such as 
relocating furnaces and hot water heaters. FEMA encourages such 
measures in its Interagency Hazard Mitigation Team Reports, through its 
publications to homeowners and insureds, by assigning mitigation 
specialists to assist flood victims and communities during the recovery 
process, and by conducting on-site mitigation workshops after flood 
disasters. States, localities, and FEMA have been working in 
partnership for years on this issue and will continue to work to 
implement the type of low cost mitigation measures cited by the 
Association. To suggest that increasing the deductible should be 
delayed until after more success is achieved in this area is not 
reasonable.
    ASFPM also recommended that FEMA improve ``quality control when 
policies are written and by evaluating the policies currently on the 
books.'' The Association argued that corrections in ratings ``will 
increase premium income in a manner that will benefit all policy 
holders.'' FIA has conducted studies to determine the possible extent 
of misrating. These studies show that only a relatively small 
percentage of NFIP policies are misrated. FEMA has underway efforts to 
improve the quality of underwriting in the NFIP.
    First, during fiscal year 1997, the NFIP conducted 396 workshops 
for insurance agents to master the underwriting requirements of the 
NFIP so that policies will be rated properly when submitted to the NFIP 
or to the Write Your Own company participating in the NFIP. So far, 150 
workshops for agents have been scheduled for fiscal year 1998.
    Second, there are other initiatives underway designed to improve 
the quality control of NFIP's underwriting. In May 1998, FIA will use a 
Geographic Information System (GIS) to ensure that structures insured 
by Preferred Risk Policies (PRP) are in fact located in zones entitling 
them to PRP rates. If this proves to be an effective tool for 
monitoring structures insured under PRP policies, FIA may expand the 
use of the GIS system as a quality control tool for other policies as 
well. Also, a condominium re-inspection program has been an effective 
tool to ensure proper rating of condominiums.
    ASPFM cited the difficult experience of State and local floodplain 
managers in administering the NFIP's `substantial damage' provision 
after significant flood damage. The Association recommended that ``FEMA 
should examine current methods for determining `substantial damage' and 
seek to simplify the process.'' FEMA has long recognized the problems 
with regard to State and community implementation of the NFIP 
substantial damage requirement. The

[[Page 66028]]

NFIP substantial damage requirement, although a necessary step to 
reduce flood damages, has often created financial hardship for 
individual property owners who must comply with a floodplain management 
ordinance which requires that buildings be elevated or floodproofed to 
an elevation above the base flood elevation (a flood having a one 
percent chance of being equaled or exceeded in any given year). FEMA 
believes that the new Increased Cost of Compliance (ICC) coverage under 
the Standard Flood Insurance Policy, a coverage mandated by Sec. 555 of 
Pub. L. 103-325 and implemented by FEMA through publication of a final 
rule on February 25, 1997, in the Federal Register 62 FR 8391, will 
help policyholders to pay for the additional costs to comply with State 
or community floodplain management laws or ordinances for substantially 
damaged as well as repetitively damaged buildings. In addition, FEMA 
has developed the ``Residential Substantial Damage Estimator,'' which 
is a computer program to assist State and local officials in estimating 
building value and damage costs for both single family and manufactured 
homes. Furthermore, FIA has worked closely with the Mitigation 
Directorate to develop a procedure for alerting both the local 
community and the FEMA Regional Mitigation staff of potential cases of 
substantial damage after a flood event. Once sufficient claims have 
been paid on the new coverage, FEMA intends to evaluate how well the 
ICC coverage is working. FEMA will also continue to examine how well 
communities are implementing the substantial damage requirement and 
evaluate methods for determining substantial damage.
    The Association also stated that ``the claims adjustment process 
should be critically evaluated to determine that claims amounts are 
appropriate. The Association is aware of anecdotal evidence that some 
policyholders may be receiving claim payments that are in excess of 
damage. Occasionally, it is perceived that a claims adjuster may be lax 
because the dollars used to pay claims are not the responsibility of 
his or her insurance company.''
    On the broader issues of claims payments and fiscal responsibility, 
FEMA has adopted a number of safeguards to ensure a claim program of 
the highest quality and service possible. A company participating in 
the NFIP's Write Your Own program bears responsibility for overpayments 
that result from error--and not simply a matter of judgement--and must 
reimburse the National Flood Insurance Fund for overpayments due to 
such errors. FEMA has a regular system of re-inspections and audits to 
maintain quality control over the claim process. The NFIP has on its 
staff experienced general property adjusters who conduct random re-
inspections of claims handled by each of the companies participating in 
the NFIP's Write Your Own program. In addition to the claims re-
inspection program, claims are audited by an accounting firm selected 
by FEMA's Office of Inspector General. These audits include a 
representative number of claim files for each year that are reviewed 
for compliance with NFIP regulations. Under the NFIP's claim audit 
procedures, Write Your Own companies themselves must hire independent 
auditors to do audits every two years. In addition, FIA is about to 
conduct a study that will review the whole process of claims 
adjustments and audits. The experience from past audits and re-
inspections is that claims overpayments have not been a significant 
problem. Nonetheless, FEMA invites concrete evidence on any 
policyholders who may have received ``claim payments that are in excess 
of damage'' or where the claims adjuster ``may be lax.'' That 
information may be submitted directly to: Federal Emergency Management 
Agency, Federal Insurance Administration, 500 C Street SW., Washington, 
DC 20472, Attention: Director of Claims.
    The Association also recommended that the expense allowance--the 
amount of premium retained by companies participating in the NFIP's 
Write Your Own program, especially the amount of commission paid to 
agents for policy renewals--be examined ``carefully because the NFIP is 
fundamentally a program designed to reduce federal disaster 
expenditures and to help floodplain occupants.'' FEMA is in the process 
of evaluating what percentage of the expense allowance is appropriate 
for companies to retain and how that should relate to meeting specified 
growth goals.
    Finally, the Association cited repetitive losses as a ``significant 
drain on the National Flood Insurance Fund'' and urged ``closer 
examination of the repetitive loss problem in order to determine 
whether certain types of risks can be discriminated, and perhaps 
targeted with mitigation information.'' The problem of repetitive 
losses has presented a significant challenge to the program. In the 
past, FIA proposed several remedies, including premium surcharges, to 
address the problem of repetitive flood losses. These proposals, 
however, encountered political opposition and have not been 
implemented.
    Currently, FEMA is addressing this problem through its Community 
Rating System (CRS), implementation of ICC coverage, and mitigation 
grant and assistance programs authorized by Congress. The NFIP's CRS, 
through community-wide premium discounts, gives incentives to 
communities to mitigate repetitive flood losses. In addition, Congress 
authorized ICC coverage not only for substantially flood-damaged 
buildings but also for repetitively flood-damaged buildings in States 
and communities that require compliance with laws and ordinances 
affecting these buildings. With passage of the National Flood Insurance 
Reform Act, Pub. L. 103-325, Congress also authorized establishment of 
a Federal grant program--Flood Mitigation Assistance (FMA)--to provide 
financial assistance to States and communities for flood mitigation 
planning and activities. A major statutory goal of FEMA is to fund 
cost-effective mitigation measures that reduce the number of 
repetitively damaged buildings. FEMA's Hazard Mitigation Grant Program 
authorized under Sec. 404 of the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act also provides financial assistance to States 
and communities to fund mitigation measures for repetitively damaged 
buildings following a major disaster declaration. FEMA will continue to 
explore other measures to address the issue of repetitive losses.
    Increasing the deductible is one relatively modest step that is 
expected to reduce outlays from the National Flood Insurance Fund by 
$6.3 million in the first full year of implementation. This action is a 
measured change compatible with Congressional intent for the program. 
The subsidy study that the ASFPM wished to see completed before the 
increase in deductible takes effect is intended to examine the affects 
of subsidy changes of much greater impact and wider scope. FEMA intends 
to pursue a balanced approach through its program initiatives for the 
NFIP with modest reductions in subsidy that are consistent with the 
larger NFIP subsidy issue. These efforts complement the recommendations 
made by the Association. FEMA does not agree that increasing the 
deductible should be delayed until larger scale solutions are 
identified and implemented.

National Environmental Policy Act

    Pursuant to section 102(2)(C) of the National Environmental Policy 
Act of 1969, 42 U.S.C. 4371 et seq., and the implementing regulations 
of the Council

[[Page 66029]]

on Environmental Quality, 40 CFR parts 1500-1508, FEMA has conducted an 
environmental assessment of this final rule. The assessment concludes 
that there will be no significant impact on the human environment as a 
result of the issuance of this final rule, and no Environmental Impact 
Statement will be prepared. Copies of the environmental assessment are 
on file for inspection through the Rules Docket Clerk, Federal 
Emergency Management Agency, room 840, 500 C Street SW., Washington, DC 
20472.

Executive Order 12866, Regulatory Planning and Review

    This final rule is not a significant regulatory action within the 
meaning of Sec. 2(f) of E.O. 12866 of September 30, 1993, 58 FR 51735, 
but attempts to adhere to the regulatory principles set forth in E.O. 
12866. The final rule has not been reviewed by the Office of Management 
and Budget under E.O. 12866.

Paperwork Reduction Act

    This final rule does not contain a collection of information and 
therefore is not subject to the provisions of the Paperwork Reduction 
Act of 1995.

Executive Order 12612, Federalism

    This final rule involves no policies that have federalism 
implications under E.O. 12612, Federalism, dated October 26, 1987.

Executive Order 12778, Civil Justice Reform

    This final rule meets the applicable standards of Sec. 2(b)(2) of 
E.O. 12778.

Congressional Review of Agency Rulemaking

    This final rule has been submitted to the Congress and to the 
General Accounting Office under the Congressional Review of Agency 
Rulemaking Act, Pub. L. 104-121. The rule is not a ``major rule'' 
within the meaning of that Act. It does not result in nor is it likely 
to result in an annual effect on the economy of $100,000,000 or more; 
it will not result in a major increase in costs or prices for 
consumers, individual industries, Federal, State, or local government 
agencies, or geographic regions; and it will not have ``significant 
adverse effects'' on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises.
    This final rule is exempt (1) from the requirements of the 
Regulatory Flexibility Act, and (2) from the Paperwork Reduction Act. 
The rule is not an unfunded Federal mandate within the meaning of the 
Unfunded Mandates Reform Act of 1995, Pub. L. 104-4. It does not meet 
the $100,000,000 threshold of that Act, and any enforceable duties are 
imposed as a condition of Federal assistance or a duty arising from 
participation in a voluntary Federal program.

List of Subjects in 44 CFR Part 61

    Flood insurance.

    Accordingly, 44 CFR Part 61 is amended as follows:

PART 61--INSURANCE COVERAGE AND RATES

    1. The authority citation for Part 61 continues to read as follows:

    Authority: 42 U.S.C. 4001 et seq.; Reorganization Plan No. 3 of 
1978, 43 FR 41943, 3 CFR, 1978 Comp., p. 329; E.O. 12127 of Mar. 31, 
1979, 44 FR 19367, 3 CFR, 1979 Comp., p. 376.

    2. Paragraph C. of Article 7 of Appendix A(1) is revised to read as 
follows:

Appendix A(1)--Federal Emergency Management Agency, Federal Insurance 
Administration Standard Flood Insurance Policy

* * * * *
    C. For any flood insurance policy issued or renewed for a property 
located in an Emergency Program community or for any property located 
in a Regular Program community in Zones A, AO, AH, A1-A30, AE, AR, AR/
AE, AR/AH, AR/AO, AR/A1-A30, AR/A, VO, V1-V30, VE, or V where the rates 
available for buildings built before the effective date of the initial 
Flood Insurance Rate Map or December 31, 1974, whichever is later, are 
used to compute the premium, the amount of the deductible for each loss 
occurrence is determined as follows: We shall be liable only when such 
loss exceeds $1,000, or the amount of any other deductible that you 
selected when you applied for this policy or subsequently by 
endorsement.
* * * * *
    3. Paragraph C. of Article 7 of Appendix A(2) is revised to read as 
follows:

Appendix A(2)--Federal Emergency Management Agency, Federal Insurance 
Administration Standard Flood Insurance Policy

    C. For any flood insurance policy issued or renewed for a property 
located in an Emergency Program community or for any property located 
in a Regular Program community in Zones A, AO, AH, A1-A30, AE, AR, AR/
AE, AR/AH, AR/AO, AR/A1-A30, AR/A, VO, V1-V30, VE, or V where the rates 
available for buildings built before the effective date of the initial 
Flood Insurance Rate Map or December 31, 1974, whichever is later, are 
used to compute the premium, the amount of the deductible for each loss 
occurrence is determined as follows: The Insurer shall be liable only 
when such loss exceeds $1,000, or the amount of any other deductible 
that the Insured selected when it applied for this policy or 
subsequently by endorsement.
* * * * *
    4. Paragraph C. of Article 7 of Appendix A(3) is revised to read as 
follows:

Appendix A(3)--Federal Emergency Management Agency, Federal Insurance 
Administration Standard Flood Insurance Policy

    C. For any flood insurance policy issued or renewed for any 
property located in Zones A, AO, AH, A1-A30, AE, AR, AR/AE, AR/AH, AR/
AO, AR/A1-A30, AR/A, VO, V1-V30, VE, or V where the rates available for 
buildings built before the effective date of the initial Flood 
Insurance Rate Map or December 31, 1974, whichever is later, are used 
to compute the premium, the amount of the deductible for each loss 
occurrence is determined as follows: The Insurer shall be liable only 
when such loss exceeds $1,000, or the amount of any other deductible 
that the Insured selected when it applied for this policy or 
subsequently by endorsement.
* * * * *
(Catalog of Federal Domestic Assistance No. 83.100, ``Flood 
Insurance''; No. 83.516, ``Disaster Assistance'')

    Dated: December 12, 1997.
Edward T. Pasterick,
Acting Executive Administrator, Federal Insurance Administration.
[FR Doc. 97-32945 Filed 12-16-97; 8:45 am]
BILLING CODE 6718-03-M