Q&A About Flood Insurance

Although the City of Palo Alto does not deal directly with insurance matters, its personnel are frequently asked questions about flood insurance. As a help, this handout has been compiled to present some information about flood insurance as we understand it. Further information can be obtained by calling the Public Works Engineering department at (650) 329-2151. Even more authoritative information is obtainable from the Federal Emergency Management Agency/Federal Insurance Administration consultant, Computer Services Corporation, at 800/638- 6620.

I got a letter from my mortgage company that says I have buy flood insurance. Is that true?

Of course: it's always the lender's prerogative to prescribe the conditions under which money will be lent. But sometimes it's beyond lender discretion -- Federal law requires that loans on structures within certain types of flood zones be protected by flood insurance.

So, is my property in a flood zone?

Yes. The entire city of Palo Alto is in a flood zone of one kind or another. But most of the city is in an `X' zone, which the Federal Emergency Management Agency (FEMA) describes as an area either lying outside the so-called `100- year flood' limit and inside the `500-year flood' limit, or as lying within the `100-year flood' limit but shallow enough to not represent a special hazard. The remainder of the city lies within one or another Special Flood Hazard Areas (SFHAs), which, roughly speaking, means an area of special hazard from a so-called `100-year flood'. (The Foothills area is a special case. It has not been studied and is Zone X by default.)

Federal regulations make flood insurance mandatory for loans on structures within Special Flood Hazard Areas.

Actually, the term `100-year flood' is misleading. Such floods do not occur every 100 years. In fact, two such floods could occur in a single year. Or such a flood might not occur for another 500 years. But, in the very, very, long run such a flood will occur at an average interval of 100 years. Put more mathematically, such a flood has a 1% chance of occurring in any given year. If you had to take a course in Statistics you probably remember how to calculate that this 1% per year chance translates to about a one in four chance over the life of a thirty year mortgage; that's a good reason for a lender to require flood insurance even if the federal government didn't require it.

All right, then, is my property in a Special Flood Hazard Area?

The SFHAs are defined on the Flood Insurance Rate Map (FIRM) for a community. The FIRM panels are available for viewing in Public Works or Planning and Zoning at City's Development Center at 285 Hamilton Avenue (across form City Hall), or Public Works can give you that information over the phone or by letter ((650) 329-2151).

Ultimately it's the lender's responsibility, and if your lender isn't convinced and still says you're in a SFHA there are only two ways out of an insurance requirement: assume the risk for yourself by paying off the loan or get the property removed from the SFHA.

Sounds good! How do I get my property out of the SFHA?

You probably can't unless you're pretty close to the edge of the SFHA. Basically, there are only two ways to get out of the SFHA:

FEMA can publish new maps and your property no longer shows as being in a Special Flood Hazard Area;

You can request that FEMA issue you a Letter of Map Amendment (LOMA) which states, in essence, that the gross data used to create the maps was in error with respect to your specific property which is high enough to no longer be considered in a Special Flood Hazard Area. But first you'll have to prove it to FEMA, and that requires hiring a surveyor.
One thing that won't get you out of the SFHA -- and the flood insurance requirement -- is showing that your lowest floor is above the flood level. It might lower your premiums, though.

I've been issued a LOMA and it says the structure isn't in the Special Flood Hazard Area. What's that mean?

The insurance requirements apply to structures, not land (there isn't any flood insurance for damage to the land). If FEMA determines that your house is outside the SFHA even though the rest of the property isn't, it will issue a LOMA for the structure. This LOMA is then valid until either the flood map is revised or some sort to remodeling expands the footprint of the house.

How did the federal government get mixed up in things like insurance and loans?

In the past, insurance companies were unable or unwilling to provide flood insurance for the simple reason that one season of flooding in even a small region could mean bankruptcy; the risk of flood damage is simply too high and tends to happen all at once so it might not be covered by premiums already collected. In fact, the chance of a 100-year flood is higher than the risk of fire. However, fire damage happens singly, here and there, at random, and can be covered as it occurs. This is not true of floods.

In order to make flood insurance available, Congress provided for the National Flood Insurance Program (NFIP) with the government acting pretty much as the insurer under the Federal Insurance Administration (FIA) under FEMA. But flood insurance was made available only on a community basis, and a community wishing to have flood insurance available had to join the NFIP and enforce federal floodplain management regulations by implementing them with local ordinances. Palo Alto joined NFIP a decade ago.

When the flood occurs, FEMA/FIA will begin its emergency financial assistance on the premise that maximum insurance was carried on the property and that relief is only needed for an amount over that `deductible'. As a practical matter, then, little or no disaster relief will be available for uninsured property.

But I got my mortgage a long time ago and I was never required to have flood insurance before even though I'm in an SFHA.

If you got your mortgage before Palo Alto joined the NFIP there wasn't any flood insurance requirement because there wasn't any flood insurance available for Palo Altans. Whether your lender should have required insurance after the city joined the program is a question for lawyers; it might depend on the wording of your particular mortgage papers. As you may be aware, though, mortgages are bought and sold among financial institutions and by certain agencies of the federal government. It's possible such a transfer occurred and the new holder of your mortgage is imposing the requirement.

If you got your mortgage after Palo Alto joined the NFIP, the lender was supposed to require flood insurance but there was a lot of ignorance of the requirements in the financial community. FEMA has recently put the pressure on lenders to conform, not just here, but everywhere.

My insurance agent says I need something called an Elevation Certificate. What's that?

One of the requirements imposed on a community like Palo Alto when it joins the NFIP is that it enforce the FEMA requirements for construction in SFHAs, the most important being that all new structures have their lowest floors constructed at or above the anticipated `100-year flood' level. Furthermore, if a `Substantial Improvement' is made to an older structure, then it, too, must have its lowest floor above the flood level, including the old part of the structure.

At the time a community joins the program there are naturally many houses in SFHAs not built high enough and these existing structures are `grandfathered' into the program at a subsidized insurance premium rate. But all new structures and `Substantial Improvements' have to pay a rate based on actuarial risk depending on the elevation of the lowest floor with respect to the anticipated flood level. And since the actuarial premiums can be even lower than the subsidized premiums owners of older houses can save some money by showing the lowest floor is above the flood level.

The elevation of the lowest floor is verified on the FEMA Elevation Certificate form.

You put `Substantial Improvement' in quotes: why?

Because the term has a special definition for flood zone development: in essence any group of improvements of any kind to the structure which will cost a total of 50% or more than the current market value of the structure is considered a Substantial Improvement and invokes all the SFHA requirements. To a Palo Altan who thinks he just spent $500,000 for his house this can sound quite liberal until reminded that he actually paid about $100,000 for his house and $400,000 for the land.

What if I got a variance to remodel my house with a lowest floor below flood level?

Theoretically, variances are available for those showing sufficient hardship, although, in practice they are quite difficult to obtain. In any case, it will probably make your flood insurance more expensive. A variance permits you to build a house that doesn't conform with requirements, but the insurance premiums are based on the configuration of the house regardless of how it got that way, and the actuarial premiums can be very high. One homeowner in Sonoma County has a $12,000/year premium requirement even though local authorities erred in permitting him to build his house that low.

Can I get flood insurance if I'm not in a SFHA?

Certainly. And you are encouraged to do so. FEMA says that one-third of the claims it pays are for properties that are not in a SFHA.

Remember, there really isn't much difference between being just inside the 100-year flood limit and being at, say, the 105-year flood limit. And there are small areas of potential 100-year flood that were simply too small to show on the FIRMs, such as watersheds of under a square mile. There are many possible local flood sources other than just the ones documented by FEMA.

Last Updated: March 14, 2007