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End of subsidy to mean rise in flood insurance rates

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A Franklin insurance agent pays about $900 for flood insurance on a rental home he owns in the city, but he expects that premium could quadruple in the coming years.

John Auld of Franklin Insurance sells flood insurance. He also faces rapid rate increases in premiums that other landlords, businesses and some homeowners can expect. The increases are happening because the federal government is eliminating flood insurance subsidies. Those subsidies help keep rates low for about 400 property owners in Johnson County.

The national flood insurance program, run by the Federal Emergency Management Agency, is $24 billion in debt. That led national lawmakers to implement the cuts in 2012. But those cuts were estimated to cause premiums for some property owners to increase by more than 10 times the initial cost in a single year. This month, President Barack Obama signed a law adjusting the effects of the flood insurance cuts to limit how fast the increases will occur.

About 400 of the 800 property owners who pay for flood insurance in Johnson County have subsidized rates. The increases affect people who have carried a flood insurance policy since before flood maps were implemented for the county, Auld said. Homeowners who have had policies since before June 2012 won’t see any increases as long as their coverage doesn’t lapse, and those with subsidized policies taken out afterward would see increases of 18 percent per year.

Homeowners who won’t suffer immediate increases could face challenges if they choose to sell their homes. The new owner would have to pay new rates, which could cost several thousands of dollars more, Auld said.

Rental properties and business aren’t grandfathered in like homes. That will mean 25 percent increases per year until rates represent a property’s actual risk. That rate could be several times higher than what an owner currently pays. Auld, who owns a rental house on Hurricane Road, expects he could be forced to pay as much as $4,000 per year in a few years.

The changes also could affect business development in flood zones, such as in Franklin. One prospective business owner considered the former Franklin city hall on Madison Street but backed out because he expected flood insurance rates would rise to $5,000 or more per year, Mayor Joe McGuinness said.

Buildings in a flood zone are required to have flood insurance if they have a mortgage, Franklin senior planner Joanna Myers said. In Franklin, that’s 182 property owners, who pay a combined $183,000 per year in premiums.

Owners of rental properties and businesses will start paying the increases every year and don’t know how high rates will go, Auld said. Rates are determined by how low a building is in the flood zone, so buildings with lower elevations will pay higher rates, he said.

For example, a property owner who pays $3,600 per year would only have to pay $550 if the lowest floor is 4 feet above the flood zone, according to FEMA. But if the lowest floor is 4 feet below the flood level, that premium would shoot up to $11,000 per year.

Property owners eventually will have to pay to get an elevation certificate to determine how high a building is, which will reflect what the true rate is, Auld said. For his rental home, he estimates his premium would be between $3,000 to $4,000, so it would take about six years of increases to get to that rate.

Terrie Chinn’s house on Edwards Street in Franklin flooded in 2008. When she rebuilt, the house was constructed about a foot higher off the ground. When she renewed her flood insurance policy, her premium dropped from about $1,000 per year to $350 because the house is higher, she said.

Chinn hasn’t heard anything about her rate increasing but would be furious if her premium started climbing 18 percent per year, she said. Since she has a mortgage on her house, she has to keep the flood insurance.

Homeowners with subsidized rates will be able to keep paying the lower rates as long as coverage doesn’t lapse. But if they sell that house, the new owner would have to buy flood insurance at the higher rate. That could make it extremely difficult to sell an older house in a flood zone because a buyer likely won’t want to pay a high flood insurance rate, Auld said.

Janice Spurr pays $843 a year to insure her home on Hemphill Drive in Franklin, which was one of few that wasn’t bought and torn down as part of the flood buyout. Her house sits on a hill and had only moderate damage during the flood in 2008. Her insurance renewal is coming up in May, and although she hasn’t heard about rate increases, she’s going to ask an agent.

She said she’s hoping rates don’t start climbing. If they do, she’ll continue to pay, especially after seeing the damage caused to her neighborhood in 2008.

“It’s just something now that you almost have to do if you live here,” Spurr said. “So hopefully I never see that again. It bothers me to have to pay it out, but it’s good to have it and not use it.”

Insurance increases

The federal government is trying to reduce $24 billion in debt in the national flood insurance program by eliminating subsidies that help keep rates low for property owners. About 400 of the 800 property owners in Johnson County who have flood insurance have subsidized policies.

Here’s how those property owners will be affected:

Rental homes, businesses

Premiums will increase 25 percent per year until rates reflect true risk. That risk depends on how low a property is in the flood zone, meaning properties that sit lower will have higher rates.

If a property owner lets coverage lapse, takes out a new policy or sells the property, the rates immediately will jump to the full price.

Owner-occupied homes

Premiums will not change unless the home is sold, coverage lapses or an owner takes out a new policy.

Homeowners with policies from after June 2012 or rate changes caused by changes in coverage will increase 18 percent per year until they reach full price.

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