Grandfathering and the NFIP

David Thompson, CPCU

Throughout the country, flood maps are changing. For some policyholders this is good news, while for others it can be bad news. As flood maps change, the premiums for flood policies change too. In some cases, a provision referred to as "map grandfathering" can benefit some policyholders and provide them with significant savings on their flood insurance policy. The term "grandfathering" refers to the ability to use a prior map if the premium using the prior map is beneficial to the policyholder.

Before the discussion of grandfathering, it's key to define some acronyms and terms:

• BFE: The computed elevation to which floodwater is anticipated to rise during the base flood. Base Flood Elevations (BFEs) are shown on Flood Insurance Rate Maps and on the flood profiles.

• FIRM: Flood Insurance Rate Maps.

• FIRM Date: The date that a community first developed flood maps.

• Pre-FIRM Building: A building that was newly built or substantially improved before the FIRM date of the community.

• Post-FIRM Building: A building that was newly built or substantially improved after the FIRM date of the community.

• LFE: Lowest Floor Elevation. The LFE is compared to the BFE to help determine the flood insurance policy premium. If the LFE is above the BFE the premium is much lower than if the LFE is below the BFE.

• Newly Built: Means the date the building permit was issued, provided the actual start of construction, repair, reconstruction, rehabilitation, addition placement, or other improvement was within 180 days of the permit date.

• Substantially Damaged/Substantially Improved: Damage of any origin sustained by a structure whereby the cost of restoring the structure to its before damaged condition would equal or exceed 50 percent of the market value of the structure before the damage occurred. All structures that are determined to be substantially damaged are automatically considered to be substantial improvements, regardless of the actual repair work performed.

• PRP: Preferred Risk Policy

When flood map changes occur, the National Flood Insurance Program (NFIP) provides a lower-cost flood insurance option known as "grandfathering." Grandfathering is available for property owners who:

• Have a flood insurance policy in effect when the new flood map becomes effective and then maintain continuous coverage, or

• Have built in compliance with the FIRM in effect at the time of construction.

Since the term "grandfathering" is most likely not understood by many consumers, it may be easier to refer to the grandfathering concept as "locking in," since that term is likely understood by more consumers. Key points with grandfathering are:

• The map zone and/or BFE are grandfathered.

• The premium is not "locked in" since it will change over time as rates change.

• The policyholder always has the choice to use the old zone/BFE or the new zone/BFE based on the premium that is more favorable. There are many situations where the new zone is more advantageous to the policyholder so both options (old and new) should be examined.

The results of grandfathering can provide cost savings to a property owner when the new map takes effect. However, there will be cases when using elevation rating with the new flood map may result in lower premiums than grandfathering. So, both options should always be evaluated. Timing is also important as most pre-FIRM buildings have only one chance to grandfather and lock in the existing zone for future rating, and that is before the new flood map becomes effective.

It is important to remember that if a building has been substantially damaged or improved, it is not eligible to be grandfathered to the flood map that was in effect at the time of the building's original construction date. The map in effect at the time of the last substantial improvement or damage must be used.

Below are conditions and examples of applying grandfather rules and some important facts about Preferred Risk Policies:

PRE-FIRM (CONSTRUCTION PRIOR TO THE DATE OF THE COMMUNITY'S INITIAL FIRM OR PRIOR TO JANUARY 1, 1975)

1. If a policy was obtained prior to the effective date of a map change, the policyholder is eligible to maintain the prior zone and Base Flood Elevation as long as continuous coverage is maintained throughout all changes of ownership. The policy can be assigned to a new owner at the option of the policyholder.

Example: A house was built in 1974 and the community's first FIRM was 1986. When the insured's policy was written, the structure was in an A flood zone. As a result of a 2009 map revision, the new flood zone is a VE zone. As long as there was no interruption in coverage, and there has been no substantial improvements or damage, the customer's policy can continue to be rated using Pre-FIRM A zone rates. If there had been multiple owners of the property after the zone change in 2009, then all owners would have had to have a flood policy in effect with no gaps in coverage. Remember, too, that the policyholder always has the option of using the new zone or BFE if that is more favorable. In this example, if the premium for zone VE was lower than the old "A" zone (unlikely, but possible) the policyholder has the choice of which zone to use.

Example: Sam built a house in 1974 and the community's first FIRM was 1986. The house was mapped as zone X. Sam purchased a policy in 1987 and in 1989 the zone changed to AE with a -2 BFE and Sam kept his policy in force. Sam can use the old zone which is more favorable to him. Sam sells the house to Betty who pays cash, does not have a loan, and does not buy a flood policy. In 1991 Betty sells the house to John who obtains a loan and is required to have flood coverage. Since continuous coverage has not existed throughout all ownerships, John is not eligible for grandfathering and must use zone AE.

2. If a policy was obtained prior to a map revision, but then the building was substantially improved, the building must be re-rated using the FIRM that was in effect at the time that the substantial improvement occurred.

Example: A house was built in 1968 and the community's first FIRM was 1976. When the insured's policy was written, the structure was in an AE flood zone. As a result of a 1986 map revision, the new flood zone is a VE zone. In 1993, the property owner completely renovated the building. As a result of the substantial improvement, grandfathering will not be an option for this policyholder. The property owner will now be required to use the VE flood zone rates, and the year of construction will change to 1993. The building now must be rated as Post-FIRM.

POST-FIRM (CONSTRUCTION ON OR AFTER THE DATE OF THE COMMUNITY'S INITIAL FIRM)

1. If a policy was obtained prior to the effective date of a map change, the policyholder is eligible to maintain the prior zone and base flood elevation as long as continuous coverage is maintained. The policy can be assigned to a new owner at the option of the policyholder.

Example: A house was built in 1994 and the community's first FIRM was 1986. When the insured's policy was written, the structure was in an A06 flood zone. As a result of a 2009 map revision, the new flood zone is AE. As long as there was no interruption in coverage and no substantial improvements or damage, the customer's policy can continue to be rated in the A06 zone. However, if an elevation certificate is available, the premium using the AE flood zone information should be compared to that of the A06 to see which provides the lowest premium.

2. Or, if a building was constructed in compliance related to a specific FIRM, the property owner is always eligible to obtain a policy using the zone and BFE for that particular map, provided that proof is submitted to the insurance company (refer to the Rating Section of the Flood Insurance Manual, Rating section for acceptable documentation). Continuous coverage is not required.

Example: A small restaurant was built in 2001 in an AE zone; the community's first FIRM was 1993. The BFE was 10 feet and the lowest floor elevation (LFE) was 11 feet, resulting in a +1 elevation difference for rating. A new FIRM for the community became effective in 2008. The building remained in an AE zone, but the BFE became 12 feet, resulting in an elevation difference of -1 foot. Since the building has not been altered, and was in compliance when constructed, it can retain the old +1 elevation difference and be rated accordingly.

PREFERRED RISK POLICIES

Buildings written on Preferred Risk Policies are required to be located in zones B, C, or X on the FIRM in effect when a policy is obtained and upon every renewal. A building which becomes ineligible for a Preferred Risk Policy due to a map change to a Special Flood Hazard Area, can be rewritten on the renewal date to a standard rated policy using the B, C, or X zone.

Example: A house is located in an X zone and is covered by a PRP. In 2009, the zone changes to zone AE. The policyholder obtains an elevation certificate which shows the structure to be one foot below BFE. While the PRP will not be renewed after the map change, the old zone (zone X) can be used if that premium is more favorable, which is likely the case. While the premium will increase (and somewhat substantially), using zone X and the Standard Flood Policy will produce a rate more favorable than using an AE zone with the lowest floor one foot below BFE. Conversely, had the elevation difference under the new map been +2 (for example) the policyholder has the choice to use the new zone and BFE since that premium would be more favorable than using the old zone (X) and a Standard Flood Policy.

SUMMARY

When a map change is approaching, it is important to remember that most pre-FIRM structures have but one chance to lock in the current flood zone and/or BFE for future rating and that policy needs to be renewed each year. The benefits of the grandfathered zone can always be transferred to the new owner if the building is sold. Post-FIRM buildings have two chances to lock in the BFE and/or flood zone at the time of construction; continuous coverage is not required. If, however, a building is substantially damaged or improved, grandfathering of previous zones or BFEs can no longer be applied. Grandfather rules do not apply to the PRP.

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Copyright FAIA, 5/1/10, David Thompson