NEWS

The U.S. Senate is expected to take a key vote Wednesday on a bill that would delay some of the flood insurance rate hikes triggered by the Biggert-Waters Flood Insurance Reform Act of 2012.

The procedural vote will determine whether the Senate will proceed with debate on the Homeowner Flood Insurance Affordability Act (S.1846). Sixty votes are required to move the measure to the floor for a “yes-no” vote.

The Senate bill would postpone for four years some of the rate hikes that are beginning to hit primary residences. It would also delay increases for properties sold after July 6, 2012, the start date of the Biggert-Waters act.

The Senate delay would be for four years, or six months after the Federal Emergency Management Agency (FEMA) proposes policy changes and regulations to address affordability issues, which the Congressional Budget Office (CBO) estimates would occur during calendar year 2018.

The Senate bill would not block rate increases for most business properties, secondary homes or repeat flood properties. Rates on those properties are scheduled to increase by 25 percent per year until they reach full cost.

The CBO estimates that the change in premium rates proposed by S. 1846 would reduce net income to the National Flood Insurance Program (NFIP) by about $2.1 billion over the 2014-2024 period.

CBO estimates that the NFIP would borrow and spend an additional $900 million over the 2014-2018 period because of this legislation. However, because total borrowing is limited under current law, additional amounts borrowed over the next five years would be offset by less borrowing in later years, resulting in no net effect through 2024, according to CBO.

The Senate bill is sponsored by Sen. Robert Menendez, D-N.J., and has 19 Democratic and 8 Republican co-sponsors.

A group of senators from coastal states held a press conference yesterday to rally support for the bill.

The House has a similar but limited proposal that would delay rate increases for only six months. Sponsored by Rep. Michael Grimm, R-N.Y, this bill (HR 3370) has 117 Democratic and 51 Republican co-sponsors but faces opposition from key Republicans including Rep. Jeb Hensarling (R-Texas), who chairs the House Financial Services Committee that has jurisdiction over flood insurance.

An overflow is when the water exceeds its boundaries; the space is filled to capacity and water then spreads beyond its limits. A tub left running creates an overflow. The tub can no longer hold the water running into it, so the water overflows onto the floor and surrounding area.

A discharge is a flowing or issuing out; water coming from a pipe. A leaking pipe discharges water from the hole in the pipe; it is not a back-up or an overflow, it is simply water issuing from a pipe at the wrong spot.

Discharge or Overflow?

The ISO HO 00 03 provides coverage for water damage that is the result of a discharge or overflow of a plumbing, heating, air conditioning, or household appliance if it is on the residence premises. This covers pipes that leak behind walls, floors, or ceilings; washing machines and dishwashers that overflow, toilets that overflow, or storm drains off premises that overflow due to high rains or floods. It is important to note that a sump, sump pump or related equipment, or a roof drain, gutter or downspout or similar equipment is not considered a plumbing system or household appliance. A discharge or overflow caused by a storm drain, water, steam, or sewer pipe  is covered as well if it is off the premises.

The coverage is for repair of the damaged property—the walls, floors, tiling, and carpet, areas that got saturated and need to be repaired or replaced. Even the tear out of a wall, for example, to get to a leaking pipe is covered. What is not covered is the leaking pipe itself; a pipe leak is often caused by simple wear and tear or age of the system, and that is a maintenance item. However, even if the insured is hanging a picture and pokes a hole in a brand new home and new pipes, the damage to the pipe is not covered. The exclusion for damage to the item causing the loss is all encompassing, and has no exceptions.

The policy specifically excludes water that overflows from sumps, sump pumps, or related equipment or water that backs-up through sewers or drains. However this is where a lot of losses occur; sump pumps may fail or be unable to handle the flow of water during a severe storm or flood, and sewers or drains may back-up due to a stoppage in the flow. Overflows are excluded for sumps because that is a common cause of loss; the sump cannot handle the volume of water it receives. For example, if the drain backs up and overflows because of heavy rainstorms, that is not covered under the policy.

To provide coverage for this occurrence there is the Water Back-up and Sump Discharge or Overflow endorsement, HO 04 95. This provides $5,000 of coverage for back up through a sewer or drain or overflow or discharge of a sump, sump pump or related equipment, even if the equipment suffers a mechanical breakdown. For example, the sump pump motor burns out and the basement floods; there is $5,000 of coverage for that damage. The coverage is for water or waterborne material, so coverage is provided for damage caused by items floating in the water. This coverage does not, however, increase the limits of liability for coverages A, B, C, or D in the homeowners’ policy. This takes the problem of defining back-up or overflow out of the equation of certain losses, since the endorsement provides the coverage that is excluded in the main policy itself.

Water, whether it be from pipes, sewers, sumps, or floods, is one of the bigger issues in homeowners policies. There is a lot of confusion surrounding what is and is not covered. Once you consider the definition of the terms, you are on your way to understanding the coverage. As always, policy language rules the day.