Home and business owners across a dozen states awoke on Tuesday to an unpleasant reality: significant portions of their property damage caused by flooding from Hurricane Sandy are unlikely to be covered by insurance.
Thousands of homeowners in New York, New Jersey and nearby states added flood insurance last year after Hurricane Irene and Tropical Storm Lee swamped much of the same area with heavy rains.
But many others are likely to find that their flood insurance policies have lapsed or that they wrongly assumed their homeowners' policy would cover the damage. That is a common misunderstanding, according to insurance experts.
Flood insurance "is mandatory if you have a federally backed mortgage and you're living in a flood-risk area," said Erwann O. Michel-Kerjan, managing director of the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania.
But, he added, "the reality is slightly different. After many events, we realize that many people who were supposed to have that coverage were not covered."
Just how many people face losses from this week's storms is not yet known, according to officials at the Federal Emergency Management Agency, which administers the National Flood Insurance Program. The program subsidizes premiums on policies that are sold through private brokers.
Although local communities work with the agency to require coverage for residents in flood zones, the federal government does not track how many people in those areas lack coverage.
Enforcement of the requirements also is spotty. Most mortgage lenders require that buyers in certain property zones have flood insurance before closing on a home purchase. But relatively few monitor compliance with the requirement when the coverage expires, meaning that some homeowners inevitably allow their policies to lapse.
Even those who are current in their federal flood policies could find that all of their losses are not covered. Policies on residences of any type are limited to coverage limits of $250,000 on the structures and $100,000 of contents, and businesses are bound by $500,000 in building coverage and another $500,000 in contents.
For Hurricane Sandy, taxpayers could be responsible for $5 billion to $10 billion of total property damages estimated at twice that amount.
This is because flood victims living in federal disaster areas will be eligible to receive aid, under certain circumstances, even if they don't have flood insurance. Among the programs are one offering grants of up to $30,000 and another consisting of loans from the Small Business Administration — available to homeowners as well — that carry a 4 percent interest rate.
That will be the case even though significant changes to the program were signed into law by President Obama in July. Among the most drastic changes is that vacation homes, businesses and properties with severe and repetitive losses will lose their flood-insurance subsidies, allowing premiums for those holdings to increase by 25 percent each year until they reach market rates — or what nonsubsidized private insurers would charge for the same policy.
Those changes stemmed from criticism that the program was largely a giveaway for wealthy beachfront property owners. Without it, they say, fewer people would be willing to take the risk of living in flood zones, particularly near the ocean.
Whether the move to market rates will survive over the long term is uncertain, at best. Real estate lobbyists, a powerful constituency in Washington, have long pushed to keep the price low for flood insurance policies because it makes it easier to sell homes in flood-prone areas.
But the new law will require market rates for newly purchased property, any property that has improvements exceeding 30 percent of its value or any new policy or renewal of a lapsed policy.
Even with those changes, the long-term survival of the program remains uncertain, according to government auditors, who have cataloged inefficiencies and management problems for years.
The program has about $18 billion in debts, said Orice Williams Brown, director of financial markets and community investment at the Government Accountability Office. Most of those debts are legacies of Hurricane Katrina, which caused such huge insurance losses that the federal program had to borrow money from the Treasury.
There are some bright spots in the flood insurance outlook, however. Thousands of homeowners who experienced flood losses this week now have coverage — thanks to the fact that they also suffered losses a year ago, from floods caused by Hurricane Irene and Tropical Storm Lee.
One stipulation of receiving federal disaster money for uninsured damage caused by flooding is that the home or business owner is then required to buy flood insurance. When they do, the coverage is entered into a federal database, according to a FEMA spokesman, and the agency checks each recipient for new disaster aid against lists of previous events.
According to FEMA statistics, since last year's storm damage, the number of federal flood policies covering properties in Pennsylvania grew by more than 7 percent, to 72,521 at the end of August. The number in New York State rose 3 percent to 168,905, while policies in New Jersey grew 2.3 percent, to 236,038.
Still, plenty of homeowners resist buying coverage, said Mr. Michel-Kerjan. "You often hear, 'I was never flooded, so I didn't think I needed that,' " he said.