For nearly 40 years the federal government has made flood insurance available to property owners, filling a gap left by private carriers, which generally decline to write the coverage.
The program has grown controversial over the years. Critics have argued that it encourages Americans to build on beaches, flood plains and other sites that shouldn't be built on -- and wouldn't be if the government weren't willing to pay when such homes and vacation spots are washed away.
Nonetheless, as the New Orleans disaster illustrates, the insurance can be immensely valuable. Policies under the National Flood Insurance Program (NFIP) will pay up to $250,000 for residential buildings, plus another $100,000 for contents that are lost. It will also pay up to $500,000 for nonresidential buildings and $500,000 for their contents.
The premiums average around $400 a year for $100,000 of coverage -- higher in very flood-prone areas. That's quite reasonable, considering the risks.
Many mortgage lenders require it, at least for property located within a flood-prone area. Fannie Mae, for example, requires coverage of 80 percent of the replacement cost of the home, or the program limit of $250,000, whichever is less.
According to a recent study by the Center on Federal Financial Institutions (COFFI), a nonprofit think tank, the federal flood insurance program has about 4.6 million policies in place, covering more than $743 billion in assets. Annual premium collections run about $2 billion.
Still, the program is not as popular as you might expect.
"People don't buy insurance unless they have to, for the most part," said COFFI President Douglas J. Elliott. Also, he said, "I think there's been a certain fatalism, particularly on the coast of Mississippi [where just] one in four homes" is covered.
"That's just shocking to me, because it's cheap stuff," he said.
Federal flood insurance "is a greatly under-bought product," said J. Robert Hunter, who once headed the program as federal insurance commissioner.
But Hunter, now director of insurance at the Consumer Federation of America, said that while the program's penetration in Mississippi and Alabama mirrors national levels of 10 to 20 percent, it is much higher in New Orleans, covering perhaps half the houses there.
But "New Orleans is an exception," he said.
Hunter and Elliott agreed that the program, though normally self-sustaining, will have to turn to Congress for help in the wake of Katrina.
The COFFI study put the program's reserves at $1.1 billion. It has the ability to borrow up to $500 million from the Treasury, plus another $500 million if the president authorizes it. The program did have to borrow $200 million last year after the four Florida hurricanes, the study said.
Hunter said this will almost certainly be the first disaster in which flood claims exceed those for wind, which are typically paid by private insurers or state-run risk pools.
"It's going to be at least $10 billion," Hunter said. "They are going to have to go for an appropriation. When I was running it, we always knew we might have to go for an appropriation" if something bad enough happened. The program is much larger now, he noted.
Hunter said that "there's going to be an interesting question about claims adjusters" because of who pays for what damage. The federal program uses private insurers and their adjusters to evaluate claims, and "company X may say, 'I can't tell if this is flood or wind, so it looks like flood because they pay it and we don't,' " Hunter said.
Elliott said that in the short run, the federal program may seek greatly increased borrowing authority to "give them time to decide whether to recoup [the losses] over time by raising premiums."
"The premiums are lower than claims are likely to be," he said, so policymakers would need to choose between subsidizing the program with appropriated funds or having it raise premiums.
Many critics would prefer higher premiums. That's an easier sell when the insurance buyers are thought of as rich people who have built in a risky location to get a better view. But New Orleans is different "because many of the people most exposed there are poor," Elliott said. Also, New Orleans is an old city where it is hard to argue that people built in a flood plain because they could get cheap insurance.
But good policy or bad, property owners who face any risk of flood should look into the program. There are some restrictions on it, meant to encourage communities to take steps to ease flood risks, but coverage is available in most places.
Hunter said many communities have maps of their flood prone areas, and some have even put those maps online. The Federal Emergency Management Agency, which administers the program, also has maps on its Web site, though they aren't easy to understand.
The maps, if you can figure them out, are a good guide to gauging your risk. Also, Hunter noted, premiums drop substantially for property located outside flood-prone areas. Since floods sometimes exceed these boundaries, those living outside a flood-prone area may want to go ahead and buy the coverage.
Besides the maps, a lot of information is available at FEMA's Web site, www.fema.gov. Click on "Mitigation and Flood Insurance" at the left.
Property owners can begin by checking to see if they already have coverage, or if they have enough.
The usual 80 percent coverage is enough in many cases, Hunter said. Flooding in some areas tends to be shallow and slow-flowing, "so you just have water on the first floor." In such places 80 percent is likely to be enough. On the other hand, if you are on a barrier island or a flood plain "where rushing water may carry your house away," you probably need 100 percent, he said.
NFIP coverage is sold directly through state-licensed insurance agents who deal directly with FEMA, and through private insurers via what the feds call the "Write Your Own" program.
But be aware that coverage does not become effective for 30 days after you sign up.
Also, consider sitting down with a property-insurance agent and reviewing your situation. A good agent can help you interpret the maps and other rules and gauge what would be a prudent level of coverage. And if, for example, $250,000 isn't enough, the agent may be able to obtain more from a private carrier that writes supplemental coverage. That may be tough to find for particularly flood-prone property.