H.R. 1264: Multiple Peril Insurance Act

H.R. 1264

Multiple Peril Insurance Act

Date
July 22, 2010 (111th Congress, 2nd Session)

Staff Contact

Floor Situation

H.R. 1264 is expected to be considered on the floor of the House on Thursday, July 22, 2010, under a closed rule with one hour of general debate, equally divided, and one Republican motion to recommit.  The legislation was introduced by Rep. Gene Taylor (D-MS) on March 3, 2009, and referred to the House Committee on Financial Services.  The Committee voted to report the bill by a vote of 40-25 on April 27, 2010.

Bill Summary

H.R. 1264 would amend the National Flood Insurance Act of 1968 to require the National Flood Insurance Program (NFIP) to enable the purchase of multiperil coverage and separate windstorm coverage.  Some Members may be concerned that the bill would expand the NFIP.  The NFIP currently has a $18.75 billion deficit, and according to CBO, it is unlikely that the NFIP would repay this debt.  The NFIP is authorized to borrow up to $20.775 billion from the U.S. Treasury.  The NFIP’s ongoing financial crisis has led the GAO to include the NFIP on a list of government programs at “high-risk” for potential losses.

Coverage and Prohibitions for Windstorms

Multiperil coverage, pursuant to the bill, would be optional insurance against loss due to flooding or windstorms.  A windstorm would be defined as any hurricane, tornado, cyclone, typhoon, or other wind event.  The bill would provide for approval and payment of claims upon proof that such loss resulted from either windstorm or flooding.  The bill would not require a claim to specify the cause of loss, whether windstorm or flooding, to be distinguished or identified. 

Separate windstorm coverage, pursuant to the bill, would be optional insurance against loss from damage due to a windstorm.  The bill would provide for approval and payment of claims upon a determination that loss was due to a windstorm or flooding, respectively.  The bill would not require a claim to specify the cause of loss, whether windstorm or flooding, to be distinguished or identified. 

The bill would prohibit multiperil coverage for property declared by a duly constituted governmental authority to be in violation of state or local laws, regulations, or ordinances intended to reduce windstorm damage.  The legislation would restrict multiperil coverage to areas in communities that have adopted adequate land use and control measures.  Multiperil and windstorm coverage would not be provided in any area (or subdivision) unless an appropriate public body adopts adequate mitigation measures (with effective enforcement provisions) which the Director finds are consistent with the criteria for construction described in the International Code Council building codes relating to wind mitigation.

The bill would authorize the FEMA Director to provide the general terms and conditions of insurability applicable to properties eligible for multiperil and windstorm coverage.  Some conditions would include:  (1) the types, classes, and locations of any properties which would be eligible for coverage, which would include residential and nonresidential properties; (2) the nature and limits of loss or damage in any areas (or subdivisions) which may be covered by such coverages; (3) the classification, limitation, and rejection of any risks which may be advisable; (4) appropriate minimum premiums; (5) appropriate loss deductibles; and (6) any other terms and conditions relating to insurance coverage or exclusion that may be necessary to carry out this subsection.

The legislation would authorize coverage for up to $500,000 for residential properties, including up to $500,000 per unit for structures with multiple dwelling units($150,000 for contents and living expenses), and $1,000,000 for nonresidential properties ($750,000 for contents and interruption of business).  Some Members may be concerned that the bill could incentivize current flood-only policyholders to convert to multiperil coverage, which would further expose the NFIP and ultimately the taxpayers.  Under the proposed bill, flood-only policies would offer maximum flood loss coverage of $350,000 for residential building and contents.  However, a policyholder that switches to a multiple peril policy would be able to purchase up to $650,000 in flood coverage that includes wind coverage.  For non-residential property owners, the incentive would be even greater.  Multiple peril policyholders would have a $1.75 million flood and wind limit (up from the $1 million flood only limit with business contents and income coverage included).  Also, some Members may be concerned that the bill would negatively impact the private sector at the expense of the taxpayers.  Wind insurance provided by the federal government would distort rates from free market based values and would eventually displace catastrophic windstorm insurance that is currently being provided by the private sector.  

Actuarial Rates

H.R. 1264 would direct the NFIP to charge actuarial (that is, unsubsidized) premiums for new multiperil and windstorm policies.  While welcoming the introduction of unsubsidized prices, some Members may be concerned that the timing and size of future claims payments cannot be forecast with enough certainty for the magnitude of the entire program.  The bill would require that coverage be provided on an “actuarial basis”, but that would not insulate the NFIP from post-event short-falls, which would add to the NFIP’s debt burden and further expose taxpayers. 

Prohibits Duplicative Coverage

The legislation would prohibit duplicate Multiperil coverage from being provided with respect to any structure (or related personal property) structure that is covered by flood insurance made available pursuant to this legislation.  The legislation would also require maintenance of flood insurance coverage as a prerequisite to windstorm coverage.  Windstorm coverage would be provided only with respect to a structure that is covered by flood insurance coverage made available under this legislation Multi-peril and wind-only coverage would only be available in communities that have adopted adequate building codes and for properties in compliance with local zoning laws both relating to windstorm damage. 

Studies and Investigations

The bill also would instruct the FEMA Director to carry out studies and investigations to determine measures for wind hazard prevention. The Director would be required to carry out studies and investigations to determine appropriate measures in wind events as to wind hazard prevention.

Background

Representative Gene Taylor (D-MS) originally introduced the Multiple Peril Insurance Act in the 110th Congress as H.R. 920.  The bill was approved by full the House on September 27, 2007, as part of larger flood insurance program reform legislation, the Flood Insurance Reform and Modernization Act of 2007 (H.R. 3121).  Legislative text substantially similar to the provisions of H.R. 920 was introduced in the Senate by Senator Roger Wicker as an amendment to S. 2284, the Flood Insurance Reform and Modernization Act of 2007. The amendment failed by a vote of 19 to 74 during consideration of S. 2284. Rep. Taylor reintroduced a substantially similar bill on March 3, 2009, as H.R. 1264.  The Obama administration has expressed opposition to the Multiple Peril Insurance Act.

H.R. 1264 would amend the National Flood Insurance Act of 1968, which created the National Flood Insurance Program (NFIP), by adding windstorm insurance to the scope of insurance coverage offered by the federal government.  Some Members may be concerned that rather than encouraging market-based solutions, the bill would saddle the taxpayers with another government program that is certain to stifle potential free market solutions including replacing insurance that is already provided by private sector companies.  Lastly, some Members may be concerned that taxpayers from other communities and states that are not as burdened by windstorms would be forced to subsidize those who choose to live or invest in risky areas.

Cost

CBO estimates that actuarially based premiums calculated by the NFIP would generate a sufficient amount to cover future costs.  As such, increased claims payments made by the program would be roughly offset by additional premiums, resulting in no net change to direct spending.  According to CBO, the NFIP might collect aggregate premiums that are above or below amounts necessary to pay expenses in a given year (particularly if a major event were to occur soon after enactment of the legislation) and over time.  In years of insufficient premium collection, the program would draw upon its reserves or available borrowing authority from the Treasury (recorded in the budget as an increase in direct spending).