BACKGROUND Flood risks can change over time. Water flow and drainage patterns can change dramatically because of surface erosion, land use, and natural forces. Likewise, the ability of levees and dams to provide the necessary protection can change. As a result, the flood maps for those areas may no longer accurately portray the current flood risks. To reflect the most current flood risks, the Federal Emergency Management Agency (FEMA) is updating the nation’s flood maps using the latest data gathering and mapping technology. New flood maps (known as Digital Flood Insurance Rate Maps, or DFIRMs) are being issued nationwide. When the new flood maps become effective, some residents and business owners will find that their property’s flood risk has changed. Some will find that their building is mapped into a high-risk flood zone (known as a Special Flood Hazard Area (SFHA) and noted on the flood maps with the letter beginning with “A” or “V”).If there is a mortgage on the property through a federally regulated or insured lender, they will now be required to purchase flood insurance. Others will find that the Base Flood Elevation (BFE) for the property has increased. Either of these changes could result in higher flood insurance premiums. *Preferred Risk Policy Eligibility Extension Option As of January 1, 2011, buildings that are newly mapped into a high-risk flood zone are eligible for a lower- cost Preferred Risk Policy (PRP) for two years from the map revision date. At the end of the period, the policy must be re-rated using standard rates (using the current map’s zone or the grandfathered zone). WHAT IS THE GRANDFATHER RULE? When flood map changes occur, the National Flood Insurance Program (NFIP) provides a lower-cost flood insurance rating option known as “grandfathering.” Grandfathering is available for property owners who: • have a flood insurance policy in effect when the new flood map becomes effective1 and then maintain continuous coverage, or • have built in compliance with the FIRM in effect at the time of construction. 1 For buildings newly mapped into an SFHA, the policy must be in effect before the 2-year PRP eligibility extension period ends. The results of grandfathering may 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. For pre-FIRM properties already in an SFHA and being mapped into a higher risk zone (e.g., “AE” to “VE” zone), the last chance to qualify for grandfathering is buying a policy before the new flood map becomes effective. For pre-FIRM properties being mapped into an SFHA for the first time (e.g., “X” to “AE” zone) and that qualify for a PRP, a policy must be in place before the 2-year PRP extension period ends in order to qualify for grandfathering*. 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: 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 (or for properties newly mapped into an SFHA, prior to the expiration of the PRP eligibility period*), the policyholder is eligible to maintain the prior zone as long as continuous coverage is maintained. The policy can be assigned to a new owner at the option of the policyholder. Example A: 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 2011 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. Example B: A house that was built in 1983 was mapped into an X zone in the community’s first and only FIRM in 1984. In anticipation of the upcoming new flood maps, the homeowner purchased a Preferred Risk Policy (PRP) 30 days before new DFIRMs’ effective date of November 1, 2011. Consequently, when the PRP came up for renewal, it would then be renewed for two more policy years. At the end of the last policy year (October 31, 2014), it would have to be converted to standard X zone rates and coverage would then have to be continuously maintained in order to keep using the X zone rates. 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 pre-FIRM structure was in an AE flood zone. As a result of a 2009 map revision, the new flood zone is a VE zone. In 2011, 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 2011. The building now must be rated as post-FIRM. Pre-FIRM Exception: If the community’s first FIRM was effective prior to January 1, 1975, and a building has not been substantially damaged or improved since its original construction, the rates can be based on the FIRM zone and/or the BFE on the FIRM in effect at the time of construction (i.e., it can be treated like a post-FIRM structure) if construction is after the initial FIRM date, but before January 1, 1975. In this case, proper documentation must be provided. In all other instances, new policies for pre-FIRM buildings must use the FIRM in effect when the coverage is applied for. Example: A small office building is built in 1974; the community’s first FIRM was 1971. It is located in a B zone, behind a levee. In 2011, a new DFIRM becomes effective showing the levee as no longer providing the required protection (“de-accredited”), placing the structure into an AE zone. The property owner decides not to purchase flood insurance as there is no mortgage on the building. Three years later, the building is sold and the new owner’s lender requires flood insurance. Even though the building is technically classified as a pre-FIRM structure, the B zone can be grandfathered for rating as there was a FIRM in effect at the time of construction (see POST-FIRM below). POST-FIRM (CONSTRUCTION ON OR AFTER THE DATE OF THE COMMUNITY'S INITIAL FIRM) Post-FIRM buildings have two opportunities to have a previous zone or Base Flood Elevation (BFE) grandfathered. The simplest way, and avoid having to provide additional documentation, is the continuous coverage option where a policy is obtained prior to the effective date of a map change2 so that the policyholder is eligible to maintain the prior zone and base flood elevation as long as continuous coverage is maintained (Example A). If coverage is not purchased before the new effective date of a map2, a building can still be grandfather-rated by providing the proper documentation to show it was built in compliance as of the date of construction (as long as there has been no substantial improvement or damage since its construction; see Example B). In either example, the policy can be assigned to a new owner at the option of the policyholder. 2 For buildings newly mapped into an SFHA, a PRP policy must be in effect before the 2-year PRP eligibility extension period ends. Example A (Continuous Coverage): In 1986, a house was built in an Unnumbered A flood zone with no estimated BFE. The community’s first FIRM was issued in 1978. There was no mortgage on this Post-FIRM building, and the property owner did not initially purchase flood insurance. In 1994, the zone changed to AE with a BFE of 10. The property owner applied for a loan soon after, and the lender required flood insurance on the building. Insurance was applied for, and an Elevation Certificate submitted with the Flood Insurance Application indicated that the lowest floor was constructed at the current BFE. The policy was issued using the new map, because it provided a more favorable rate than the Unnumbered A zone in effect when the house was built. In 2010, another map revision occurred and the house remained in the AE zone, but the BFE increased to 11. As long as there was no interruption in coverage and no substantial improvement or damage, the property owner’s policy can continue to be rated using the BFE of 10 in the AE zone, at each subsequent renewal. Example B (Built in Compliance): A small restaurant was built in 2001 in an AE zone. The community’s first FIRM was in 1993 and was still in effect on the date of construction. The BFE was 10 feet on the 1993 FIRM and the lowest floor elevation (LFE) was 11 feet, resulting in a +1 elevation difference for rating. A new DFIRM for the community became effective in 2011. 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 remain being rated using +1 elevation difference. SUMMARY When a map change is approaching, it is important to remember that most pre-FIRM structures have but one chance3 to lock in the current flood zone for future rating which is before the new maps become effective; that policy then 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 – before the maps become effective2 or after the effective date, but with the proper documentation. Continuous coverage is not required. If, however, a building is substantially damaged or improved, grandfathering of previous zones or BFEs can no longer can be applied. 3 For buildings newly mapped into an SFHA, the policy must be in effect before the 2-year PRP eligibility extension period ends. 4 Premiums are based upon $200,000 in building coverage and $80,000 in contents, using standard deductibles and January 2011 rates for a single- family residence, one-floor, without a basement. GRANDFATHERING PREMIUM SAVINGS EXAMPLES4 The NFIP’s grandfathering provision often offers a premium savings to property owners. The examples below will show how an agent can utilize a variety of cost saving options available through the NFIP. To simplify the examples, potential annual premium increases were not applied to any of the premiums. EXAMPLE 1: A home was constructed in 1974. The first (and current) FIRM became effective in 1984 and placed the home into a C zone. The new DFIRM will soon become effective and the property will be mapped into Zone A. The home is considered a pre-FIRM building, so if no PRP is purchased before the end of the 2-year PRP Eligibility Extension period following the map revision, the building will not qualify for grandfathering; an A zone rate will be used and the annual premium will be $2,235. However, if a PRP is purchased before the 2-year PRP eligibility extension period expires, the property will be eligible for grandfathering. By purchasing a policy before the maps become effective, the homeowner will pay $343 for the first year and two subsequent renewal years. Upon the last renewal year, the PRP will have to be converted to a standard-rated X zone policy ($1,439) and will continue to be rated that way following every renewal as long as continuous coverage is maintained. Compared to the non-grandfathered A zone rated premium, grandfathering results in savings of more than $5,500 in three years. EXAMPLE 2: A home was built in an AE zone in 1995; the community’s first FIRM was issued in 1991. The difference between BFE and LFE was +1 foot. When the new DFIRMs became effective, the BFE increased 2 feet, so that the elevation difference was now a -1 foot. The property received a notice requiring flood insurance. The premium calculated out to be $4,873. However, because it was a post-FIRM structure, it could be grandfathered using the previous BFE. This resulted in a premium of $884 or a savings of nearly $12,000 over the next 3 years. EXAMPLE 3: A community’s first FIRM was issued 6 years ago. A home was built a year later in an X zone. Now, new DFIRMs are being issued that will place it in an AE zone. The property owner purchases an elevation certificate after the new map takes effect, and the survey indicates that the lowest floor is 2 feet above the BFE. If the property owner purchases a PRP during the PRP Eligibility Extension Period ($343), the building can be grandfathered using a standard X zone rate for subsequent years ($1,439). However, by using the new maps at the end of the PRP Eligibility period, elevation rating would actually provide additional savings, as the rate for an elevation difference of +2 is only $639. So, by using the new DFIRM information to rate when the PRP Eligibility period ends, this would result in premiums that are less than half the grandfathered premium and a savings of close to $2,500 in 3 years. ADDITIONAL RESOURCES The following are resources regarding map changes and grandfathering: • NFIP Help Desk: 1-800-427-4661 • Rating using the Grandfather Rule: www.fema.gov/pdf/nfip/manualwww.fema.gov • Information about effects of mapping changes and a status of mapping projects nationwide: Agents.FloodSmart.gov • FEMA’s consumer site about flood insurance and PRP Eligibility Extension: www.FloodSmart.gov • View and print current and past (historic) flood maps for grandfathering: msc.fema.gov • Flood hazard mapping questions, contact the FEMA Map Information eXchange (FMIX): 1-877-336-2627 • Information about FEMA’s latest efforts in updating the flood maps: www.fema.gov/plan/ffmm.shtm • For more information on substantial damage and substantial improvements: http://www.fema.gov/library/viewRecord.do?id=4160