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Flood insurance: Costs rising, claims 'confusing'

Floods swamp a house near the town of Hygiene, Colo.
Helen H. Richardson | The Denver Post | Getty Images
Floods swamp a house near the town of Hygiene, Colo.

More homes and businesses In the U.S. are feeling the devastating impact of flooding, as was dramatically demonstrated in Colorado. But most households remain without flood insurance—and obtaining it may become more difficult.

Only 18 percent of Americans have any kind of flood insurance coverage. For those who might want it, the price is about to go up. That's because subsidies to policyholders for the federal government's flood insurance program—the National Flood Insurance Program, which is nearly the sole provider of flood insurance—are to phase out starting Oct. 1.

The rising premiums, along with continuing claim battles surrounding flood insurance, are ripe with confusion, said one analyst.

"The lack of any real competition for premiums and a less-than-transparent process by the federal government for administration of funds and policy guidelines will only add to the difficulties and confuse people," said Marc Roy, professor of disaster management at Tulane University.

"And the quality of work involved to get claims processed Is not good and also confusing," said Roy, a former chief of staff of the Federal Emergency Management Agency during President George W. Bush's administration. FEMA is administrator of the insurance program. Roy said that as a homeowner, he personally has outstanding claims for hurricane damage.

The program is hurting for cash after claim payouts from storms like Irene and Katrina. Its reported deficit is $28 billion. Last year's Hurricane Sandy alone cost the government more than $7 billion in paid losses.

As a result, Congress passed the Biggert-Waters Flood Insurance Reform Act in 2012. That act eliminates government subsides to some 20 percent of policyholders. In some cases, premiums could go as high as $20,000 a year.

"We need these reforms to move premiums to more economic soundness," said Robert Detlefsen, vice president of public policy for the National Association of Mutual Insurance Companies, a trade group for the industry.

"Historically, prices for premiums have been too low, especially in high flood areas where they don't reflect the risk of flooding," he said.

It's not just the insurance industry—which functions as a servicer between policyholders and the government and receives some of the premiums—that sees a benefit to higher costs.

The Union of Concerned Scientists, a nonprofit group of citizens and scientists, wants premiums raised to reduce what it calls "risky patterns of land development."

"Subsidized insurance rates are only reinforcing risky development choices when it comes to building in flood areas," said Rachel Cleetus, the group's senior climate economist.

"Storms can cause enormous damage and most importantly, a loss of life. We need to make better choices going forward in where we build," she said.

'Implementing law as directed by Congress'

Some flood insurance policyholders are already subject to higher premiums. As part of Biggert-Waters, secondary homes—homes that are not a primary residence—started seeing 25 percent increases from Jan. 1, when policies were renewed. The 25 percent will be added each year until the premiums reach a designated premium level.

(Read more: Powerful typhoon kills 20 in southern China, swipes Hong Kong)

According to FEMA, starting on Oct. 1, people in homes with policy lapses or that have been sold and are 4 feet below the agency's base-flood elevation, could have premiums of $9,500 a year.

For individuals with homes at FEMA's base-elevation levels, the rates could be $1,410 a year. Those with homes 3 feet above base-flood elevation could pay only $427 a year.

But in high-risk areas, FEMA says on its website, premiums could reach in "excess of $20,000 a year" in some cases.

""FEMA is implementing the law as directed by Congress," said FEMA spokesman Dan Watson.

There is resistance from within Congress on the ending of the subsidies. Sen. Mary Landrieu, D-La., and Rep. Bill Cassidy, R-La., are seeking to keep the funds by asking for FEMA to delay the start date. (Cassidy is running against Landrieu in 2014 for her Senate seat.). Lawmakers from New Jersey and New York are also saying their constituents can't afford the increases.

'Difficult to get reimbursed'

Even if businesses and homeowners have flood insurance, filing claims can be a challenge.

Claims are processed through a regular insurance firm, but damages are paid by National Flood Insurance Program. Analysts say policyholders don't always know what is or isn't covered. For instance, flood insurance does not cover flooding in a basement.

"Traditional homeowner insurance policies don't cover floods, but flood insurance is not meant to be comprehensive," said David Brown, a lawyer whose firm specializes in insurance law.

"And that's where policyholders get confused. They think something is covered in flood insurance or their homeowners, and it's not," he added.

"The issue is usually the value of what we see and what a homeowner sees," said Jeff Moore, vice president of claims at Wright Flood Insurance.

"They end up saying that they think something they lost in a flood is worth more than we say it is," he said.

The focus of legal disputes varies depending on, among other things, whether claim seekers hold flood insurance.

(Read more: Colorado floodwaters menace state's $41 billion agriculture sector)

"For the people without flood insurance, the litigation revolves around the question of whether their insurance agent or, in some cases, their mortgagor, told them they didn't need flood insurance or should have affirmatively told them that they needed such coverage," said Robert Redfearn, a New Orleans attorney.

"For those with insurance, the issue is which is the cause of the damage—flood or wind," he added. "Wind, but not flooding water, is covered by homeowners insurance, and fights can spring up over what's covered by which policy and what actually caused the damage."

"And flood claims are against the government rather than a private insurer, and the damages which might be recoverable against a private insurer outside of the policy are not recoverable against the government," he said.

Moore said most cases are settled out of court.

"About 99 percent see some sort of agreement before they reach a judge," he said. "There's usually a financial agreement somewhere in between what the two sides want."

Roy said he's still waiting for his claims to go through from damage inflicted by 2012's Hurricane Isaac to a house he owns in New Orleans.

"I've spent around $18,000 to get it fixed and every time I call the insurance company about the claims, they say they've lost the pictures I took or lost something else," the Tulane professor said. "Even when you do have insurance, it's difficult to get the reimbursements."

(FEMA's Watson said the majority of claims are handled quickly, but if policyholders need assistance, they should contact FEMA directly.)

'Flood insurance has to be run better'

As it stands now, higher rates will go into effect over a five-year period starting in late 2014 for flood insurance policyholders who had so-called "grandfather" coverage. They avoided higher rates—as long as they kept up their premiums—in flood-designated areas even when redrawn flood maps showed higher risk. But if those maps are revised now to show greater hazards, the premiums will rise.

More homeowners could face having to buy flood insurance—with the higher premiums—as FEMA redraws its flood danger maps, forcing business and homeowners to purchase coverage if the areas are determined to be flood hazards.

In the end, said Roy, whatever the government does or doesn't do with premiums, a better system is needed.

"The new program does provide some clarity on rates," he said. "But this whole structure of flood insurance has to be run better."

"The people in Colorado didn't think they needed flood insurance and the issues for those in Louisiana and the East Coast from Sandy are not going away. It's confusing for people," he said.

—By CNBC's Mark Koba. Follow him on Twitter @MarkKobaCNBC

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