Drowning in FEMA's Flood Insurance

(MoneyWatch)  In today's piece on flood insurance, AOL Housing Watch correspondent Charles Feldman raps the Federal Emergency Management Agency (FEMA) for its shoddy management of the federal flood insurance program that gives insurers a "sweet-heart deal."

These words echo yesterday's BNET Finance report on an Alabama Press-Register story which showed that property casualty insurers were profiting from the program to the tune of millions of dollars. However, AOL's piece, and its subsequent comments, shed new light.

Feldman's thesis is that FEMA is engaging in "mission creep," adding more and more homes to the ones that need to buy this expensive insurance. By creating a one-in-a-hundred-year flood zone, FEMA is forcing homeowners who are very unlikely, even if they let their 30-year mortgage run its course, to ever experience a flood. But they have to buy it anyway, unless their municipality forces FEMA to back down.

That's unlikely, since cash-strapped municipalities are more than happy to use FEMA rules to slap on extra charges that go into their coffers and keep engineers, zoning officers, local surveyors, architects and secretaries employed.

As reported by BNET, flood insurance is supposed to be a wash for insurers. They simply sell the federal insurance at cost. But that doesn't stop them from making money when a flood does occur. They provide the claims adjustors who go out and review the water-logged carpets, fried appliances and washed-away walls to decide how much that insurance is actually going to pay. Claims adjustors are expensive; and their fees become a profit center for insurers like State Farm and Nationwide, the Press-Register claims.
But there are other wrinkles that angry commentators on the AOL story pointed out. Insurers are eager to get out of flood prone areas and on to safer ground. Now they have an excuse. Allstate is apparently telling customers that if they refuse to buy the expensive flood insurance, it will cancel their policies.

And according to AOL readers even mortgage companies are taking their piece of the pie. If you don't ask for flood insurance and pay for it yourself, your mortgage company will buy it for you - and charge a steeper price.